Suppose That the One-Year and Two-Year Zero-Coupon Rates Are 6

question 7

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 rate move down to 4% or up to 9%. What must be the probability of the up move for the rates to be arbitrage-free?

• A) 0.20
• B) 0.25
• C) 0.50
• D) 0.60

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Definitions:

Supplement Diet

The practice of taking vitamins, minerals, or other nutritional products to add to one's daily food intake.

Vitamins

Organic compounds that are essential in small amounts for the body's normal growth, functioning, and health maintenance.

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Substances derived from natural sources such as plants, animals, and minerals, used for therapeutic or other health-related purposes.

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A form of treatment involving manipulation of the soft tissues of the body to relieve pain, reduce stress, and enhance overall well-being.