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Basic Question 2 of 4

Assume in a 2-period binomial interest rate tree, the two nodes to the right of N are NH and NL, and the two nodes to the right of NH are NHH and NHL, and the two nodes to the right of NL are NLH and NLL. The backward induction methodology says to determine the value at NH, we need to know the values at:

A. NL and N
B. NHH and NHL
C. NLH and NLL
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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz

Tamara Schultz

Learning Outcome Statements

describe the process of calibrating a binomial interest rate tree to match a specific term structure;

describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node;

compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice;

CFA® 2025 Level II Curriculum, Volume 4, Module 27.