- 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
There are two advantages in using the lognormal distribution of interest rates. What are they?
II. High volatility at higher interest rates.
III. The implied forward rate is exactly the mean of adjacent interest rates.
I. Interest rates never become negative.
II. High volatility at higher interest rates.
III. The implied forward rate is exactly the mean of adjacent interest rates.
Correct Answer: I and II
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