100.00As an example, the price at node A is obtained as follows:Price = (prob × (P + coupon/2) + prob × (P + coupon/2))/(1 + rate) = (0.5 × (100 + 3) + 0.5 × (100 + 3))/(1 + 0.0653) = 99.79.A up down 0.5 0.5The bond values at the other nodes are obtained in the same way.The calculation for node 0 or time 0 is0.5 0.50.5[(99.79 + 3)/(1+ 0.063) + (100.20 + 3)/(1 + 0.063) ] =

00AS AN EXAMPLE, THE PRICE AT NODE A IS OBTAINED AS FOLLOWS

CFA 2018 QUESTION BANK 02 THE ARBITRAGE FREE VALUATION FRAMEWORK

100.00

As an example, the price at node A is obtained as follows:

Price

= (prob × (P

+ coupon/2) + prob × (P

+ coupon/2))/(1 + rate)

= (0.5 × (100 + 3) + 0.5 × (100 + 3))/(1 + 0.0653)

= 99.79.

down

^0.5

The bond values at the other nodes are obtained in the same way.

The calculation for node 0 or time 0 is

0.5

0.5[(99.79 + 3)/(1+ 0.063)

+ (100.20 + 3)/(1 + 0.063)

] =