I noticed that most binomial trees have forward rates on them rather than spot rates, is it because we can only use forward rates to value bonds with embedded options? But for straight bonds, we can use both spot rates and forward rates? I am just a little confused at why sometimes binomial trees have spot rates and sometimes have 1-period forward rates.
Binomial trees _ never _ have spot rates; they have _ only _ 1-period forward rates. (Note: the 1-period forward rate starting today is the same as the 1-period spot rate. It may look like the tree is using the spot rate, but it isn’t; it’s using the forward rate that happens to equal the spot rate.)
Ah got it! Thanks
You’re more than welcome.