Assume a Binomial Pricing Model Where There Is an Equal

question 26

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 5 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)$8,250.
• B)$10,799.
• C)$12,550.
• D)$15,875.
• E)$17,455.

---

Definitions:

Fallacy

An error in reasoning that renders an argument logically invalid, often due to a misleading or unsound premise.

Generalization

The process of forming general concepts by abstracting common properties of specific instances.

Too Slowly

At a pace or velocity that is considered insufficient or less than desired, often leading to frustration or delay.

Too Much Evidence

A situation where the abundance of information or data complicates the decision-making process or leads to confusion.