Assume a Binomial Pricing Model Where There Is an Equal

question 24

Multiple Choice

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year. What should be the price of a three-year 6 percent floor if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two.

• A)$44,060.
• B)$66,030.
• C)$22,462.
• D)$21,598.
• E)$25,000.

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Definitions:

Domestic Corporations

Companies that are incorporated and operate in the same country where they were established.

Tax-free Transaction

A financial transaction that is not subject to taxes by the governing authority, often used in strategic financial planning.

Net Assets

The total assets of an entity minus its total liabilities, representing the owners' equity in the company.

Goodwill

An intangible asset representing the excess of purchase price over the fair market value of identifiable assets and liabilities in a business acquisition.