CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

For a t-period binomial interest rate tree, there are ______ final payoffs.

A. t2
B. 2t
C. t + 1
Correct Answer: C

This is because a binomial interest rate tree is recombining. An up-down movement has the same ending value as a down-up movement.

User Contributed Comments 2

User Comment
cfa2017 Given current level of short-term rate r, next-period short rate can take on only two possible values: an upper value ru and a lower value rl, with equal probability of 0.5.

In period 2, the short-term interest rate can take on four possible values: r uu, r ul, r lu, r ll.
davidt87 cfa2017 no dude, did you even read the answer? In period 2 there are 3 final payoffs, because the upper and lower values of the period 1 payout options combine to the same middle value:

5
- 4 -
3 3
- 2 -
1
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