Binomial Model (probability up and down)

CFA Level II
#1

Could someone please explain this to me? When using the binomial model, when is it appropriate to calc the probability of an up or down move ( (1+r-d)/(u-d) ) and when do you just use 50/50?

In the examples I have been doing, it seems like you need to calc when using the binomial trees for options and you assume a 50/50 probability when using binomial trees for fixed income. Is this right? It seems counterintuitive to me as it should be consistent across the board.

#2

You use 50/50 for fixed income (bonds) and the 1+r-d) stuffs for equity (option). INMO

#3

The 1+r-d/(u-d) os called risk neutral probability. It is not an empirical probability. It is the probability that creates a risk neutral tree. But that seems a bit theoratical now. you would use it to value options as preppie pointed out above.

#4

Got it. Thanks guys