Would someone please explain how the computed value is arrived at in exhibit 6 on page 296 in cfai text volume 5?

Got it. Work backwards from right to left. The short term rates how are they computed.?will they be given in the exam?

yup, you are not required to calculate the rates… Although it is nice if you understand where they came from. It really is not that complicated.

Tell me how.

Exhibit 12 and 13. Pg 305-306 how are the short term rates arrived. adding 35 bps to values in exhibit 11 doesn’t give same values as shown.

i dont have the book infront of me but i think i know what you are talking about you do not add 35 bps to the values in the tree you add them to the spot rates, and then you build a new tree and…if you have an understanding of how a tree is built, you will see that simply adding 35 bps to the spot rates is not the same as adding them to the tree now regarding how a tree is build, i hope you can try to figure it out on your own. Just cause even though it is an easy concept, it is just bitchy to explain. Do you have Schweser? Schweser explains it well, if not send me your email, I will send you the few pages out of Schweser that explain it. Not a major copyright violation…

I think Schweser does a better job on this reading

Have schweser. Which page

188 fixed income

guys check out this paper on BDT model written by the one of the founders of this model- Emanuel Derman http://www.ederman.com/new/docs/faj-one_factor_model.pdf to get an intuitive understanding I found this paper a very short and crisp read

^ thanks i always wants to see that

Thanks gulfcfa and factor hedge

sorry to necro this thread but how do you solve practice question 1? page 297, volume 5. They don’t give you coupon rate… and what do you do with volatility? I understand it changes the rates but do we ever use 10% or 20% on our calculations?

Its based on the hypothetical issue on pg. 290: Coupon 5.2%. So using the tree on pg. 297, work back and find the value of the bond, which turns out be different than par (which is where the bond is currently assumed to be trading). In other words, this example is illustrating the impact of our volitility assumptions in valuing bonds with interest rate trees.

ahhh ok. i was totally confused as t hw they got the coupon rate. oops. It didn’t help that the practice question 2 right underneat told you the coupon rate right away so I thought i just missed where they told me it was 5.2 Guess it was a few pages back.