The BDTBONDT.lng Model

Black/Derman/Toy Binomial Interest Rate Model

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Construct an interest rate tree/network to match a given yield-to-maturity curve and volatilities. In the BDT model, possible future short rates are modeled as a binary (recombining)tree where each node has the two features:

Prob[rate goes up] = Prob{rate goes down] = .5, and

For each period i: uprate/downrate = constant.

The network, with time going left to right, looks like:

3 ...

/

2

/ \

1 3 ...

\ /

2

\

3 ...;

Keywords:

Bonds | Yield Curve | Black/Derman/Toy | Option Pricing | Binomial Option Pricing | Interest Rate | Derivatives |