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

question 13

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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A publication that provides advice and analysis on investment opportunities, market trends, and financial strategies.

Consecutive Years

A period of time consisting of sequential years immediately following one another without interruption.

Predicting

The action or process of making forecasts about future events or outcomes based on current or historical data.

Weak Form

The hypothesis that past stock prices and trading volume do not affect future stock prices, suggesting that technical analysis cannot predict future movements.