Assume in a 2-period binomial interest rate tree, the two nodes to the right of N are N_H and N_L, and the two nodes to the right of N_H are N_HH and N_HL, and the two nodes to the right of N_L are N_LH and N_LL. The backward induction methodology says to determine the value at N_H, we need to know the values at:

A. N_L and N
B. N_HH and N_HL
C. N_LH and N_LL

Correct Answer: B

Backward induction is the process of valuing a bond using a binomial interest rate tree.

"Backward" because in order to determine the value of a bond at Node 0, you need to know the possible values of the bond at later future nodes.