- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 33. The Arbitrage-Free Valuation Framework
- Subject 2. Interest Rate Trees and Arbitrage-Free Valuation

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**CFA Practice Question**

In the binomial interest rate tree, if i

B. 3.33%

C. 3.66%

_{1, L}is 3%, and the assumed volatility of the one year rate is 10%, the implied forward rate is:A. 3.24%

B. 3.33%

C. 3.66%

Correct Answer: B

i

_{1, H}= i_{1, L}e^{2σ}= 3.66%. The implied forward rate is the mean of the two rates.###
**User Contributed Comments**
2

User |
Comment |
---|---|

BMarf |
(3% + 3.66%) / 2 = 3.33% |

davidt87 |
[(2 * 0.1) 2ndLN] * 0.03 = 0.0366 |