- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 27. The Arbitrage-Free Valuation Framework
- Subject 2. The Basics of Creating a Binomial Interest Rate Tree
CFA Practice Question
In the binomial interest rate tree, if i1, L is 2%, and the assumed volatility of the one year rate is 20%, i1, H is:
B. 2.44%
C. 2.98%
A. 2.4%
B. 2.44%
C. 2.98%
Correct Answer: C
i1, H = i1, Le2σ
User Contributed Comments 4
| User | Comment |
|---|---|
| yuriy | The tree is a set of possible interest rate paths that are used to value bonds with a binomial model. |
| ashish100 | Can some explain how to calculate that? Thank you. |
| ashish100 | (.4 2nd ln ) * 2 |
| davidt87 | just to clarify ashish means 0.02. dunno why you guys like switching between decimals and non decimals to represent percentages |