CFA CFA Level 2 Interest binomal tree

# Interest binomal tree

• Author
Posts
• ensenmason
Participant
• CFA Level 2
0

I have looked at the calculation for building the binomal tree in three different sets of material.  It makes zero sense.  Does anybody know of any resources that might make sense of it?

• ensenmason
Participant
• CFA Level 2
5

Specifically how the one std dev up and down is calculated.  I can Calc present value and what not.

• googs1484
Participant
• CFA Level 3
4

that’s just because its in continuous time. For example; if the rate at node one (lower) is 5% and the standard deviation of interest rates is .005 then the rate at node one (upper) is 5 * e^(2)(.005). If you are going from an upper node to a lower node then just toss a minus sign in front of the exponent term.

• ensenmason
Participant
• CFA Level 2
2

Oh.  The curriculum has some bizarre material about the e function and Euler’s constant.  If that’s the case, I’m good.  Thanks.

• ensenmason
Participant
• CFA Level 2
2

How do I do “e” on the TI?  Is that the constant .5772156649 or the 2nd on the LN key?

• googs1484
Participant
• CFA Level 3
1

@ensenmason each adjacent rate at each node is actually 2 stand dev apart but that besides the point. You will not need to build an interest rate tree on the exam. If you know how to calculate the bonds PV with the tree then you’re in good shape. If you want to build the tree then focus on that the second week in June.

• googs1484
Participant
• CFA Level 3
0

2nd LN, correct.

• ensenmason
Participant
• CFA Level 2
0

Thanks!

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