Suppose That the One-Year and Two-Year Zero-Coupon Rates Are 6 $r _ { d }$

question 2

Multiple Choice

Suppose that the one-year and two-year zero-coupon rates are 6% and 7%,respectively (assume continuous compounding) .After one year,let the one-year zero-coupon rates move down to $r _ { d }$ or up to $r _ { u } = 1.2 r _ { d }$ ,with equal probability.The rate $r _ { u }$ that is arbitrage-free under these conditions is

• A)5.92%
• B)6.63%
• C)7.27%
• D)8.73%

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