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:

Asset Value

The monetary worth of physical or non-physical items owned by an individual or entity, which can be converted into cash or provide economic benefits.

Deadline

A specific time or date by which a task must be completed or a project must be finalized.

Corporate Demand

The total demand for products or services generated by businesses and corporations.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values.