Assume a Binomial Pricing Model Where There Is an Equal

Multiple Choice

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year. What should be the price of a three-year 5 percent floor if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two.

A) $8,250.
B) $10,799.
C) $12,550.
D) $15,875.
E) $17,455.