Suppose That the One-Year and Two-Year Zero-Coupon Rates Are 6 $r _ { d }$

Multiple Choice

Suppose that the one-year and two-year zero-coupon rates are 6% and 7%, respectively (assume continuous compounding) . After one year, let the one-year zero-coupon rates move down to $r _ { d }$ or up to $r _ { u } = 1.2 r _ { d }$ , with equal probability. The rate $r _ { u }$ that is arbitrage-free under these conditions is

A) 5.92%
B) 6.63%
C) 7.27%
D) 8.73%