- CFA Exams
- CFA Exam: Level II 2021
- 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. 2.44%

C. 2.98%

_{1, L}is 2%, and the assumed volatility of the one year rate is 20%, i_{1, H}is:A. 2.4%

B. 2.44%

C. 2.98%

Correct Answer: C

i

_{1, H}= i_{1, L}e^{2σ}###
**User Contributed Comments**
4

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

yuriy |
The tree is a set of possible interest rate paths that are used to value bonds with a binomial model. |

ashish100 |
Can some explain how to calculate that? Thank you. |

ashish100 |
(.4 2nd ln ) * 2 |

davidt87 |
just to clarify ashish means 0.02. dunno why you guys like switching between decimals and non decimals to represent percentages |