Hi Guys! I’ve got a quite specific question on the reading 44. In the question 4 and 5 in the curriculum, the solution uses (p 381-382), for discounting the Year 1 Cash flows, the par rate instead of the rate in the binomial interest rate tree. It’s the first time I see that. Does someone know why? Are there other cases where you use the par rates instead of the binomial interest rate tree? Thank you in advance!
Glad to see im not the only one here who caught this - Is this an error - didnt see it in errata. Hopefully a bump can get an explanation.
Sabinab, believe that’s a mistake in the book…
See the erreta… http://www.cfainstitute.org/Eratta/2015_level_II_errata.pdf
The rate in the binomial tree listed for Year 0 should be the par rate (2.250), which is consistent with the rest of the problems in the chapter, not 2.5% (which was the rate used in the examples throughout most of the chapter). The 1-year par rate, 1-year spot rate, and 1-year forward rate zero years from now are the same…
Hope that helps!
edit: didnt see the date of the original post…