Need help understanding interest rate binomial trees - Reading 44

CFA Level II Fixed Income
#1

I read through this reading, and for some reason, I’m just lost on something very basic. I’m confused on EOC #5, and the solution offers no explanation. Is it possible that someone can walk me through problem 5. My main problem is that I can’t even get started because I don’t understand where the percentages in the nodes come from (such as 8.481% and 6.944% in part A).

Thanks for any help :slight_smile:

#2

the percentages in the tree are 1 year forward rates. they are to be used as the discount rate for the cash flows. if the question asks for half year cash flows, you have to divide that by two, if quarterly then divide by 4, etc.