When the Number of Time Periods in a Binomial Model

question 15

Multiple Choice

When the number of time periods in a binomial model is large,what happens to the binomial probability of an up move?

• A)it approaches 1.0
• B)it approaches zero
• C)it fluctuates without pattern
• D)it converges to 0.5
• E)none of the above

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Definitions:

Compounded Semi-Annually

A frequency of interest calculation where the interest is added to the principal every six months, resulting in earning interest on interest in the second half of the year.

Present Value

The current value of a future sum of money or stream of cash flows, given a specified rate of return.

Perpetuity

A type of financial instrument that pays a fixed amount of cash flows indefinitely, without a maturity date.

Compounded Monthly

A method of calculating interest in which the interest earned each month is added to the principal, and future interest is calculated on the new total.