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Basic Question 4 of 4
Assume one year spor rate S1 is 3%, and 2 year spot rate S2 is 3.2%. Interest volatility is 20% for all the years. What is the higher rate at year 1 in the bionomial interest rate tree?
B. 4.153%
C. 5.072%
A. 3.784%
B. 4.153%
C. 5.072%
User Contributed Comments 2
| User | Comment |
|---|---|
| berns23 | Shouldn't the answer be C? 5.072% i.e 0.034e*(2x0.2) |
| berns23 | Nvm..I finally got it. Page 287 is clear enough. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
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.