CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

Assume in a 2-period binomial interest rate tree, the two nodes to the right of N are NH and NL, and the two nodes to the right of NH are NHH and NHL, and the two nodes to the right of NL are NLH and NLL. The backward induction methodology says to determine the value at NH, we need to know the values at:

A. NL and N
B. NHH and NHL
C. NLH and NLL
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.

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