- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 27. The Arbitrage-Free Valuation Framework
- Subject 3. Valuing an Option-Free Bond with a Binomial Tree
CFA Practice Question
When we calibrate a tree to a yield curve, which statement is FALSE?
B. Both rates next period could be lower than the current rate.
C. One rate must be greater than or equal to the current rate, and one rate must be lower than or equal to the current rate.
A. Both rates next period could be greater than the current rate.
B. Both rates next period could be lower than the current rate.
C. One rate must be greater than or equal to the current rate, and one rate must be lower than or equal to the current rate.
Correct Answer: C
If we calibrate a tree to a positively sloped yield curve, then it is possible that both rates next period could be greater than the current rate; although the upper rate will be greater than the lower.
By contrast, if we calibrate a tree to a negatively sloped curve, then it is possible that both rates next period could be lower than the current one.
User Contributed Comments 1
| User | Comment |
|---|---|
| Logaritmus | Extreme wording on question determine answer. |