Constructing the Binomial Interest Rate Tree

If a lognormal binomial rate tree was designed with an assumed interest rate variance of zero, the interest rate tree would reflect the values of the:

That's not right. The par curve rates are not used for discounting cash flows as other curves are.

Actually, no. The spot curve is used to discount zero-coupon bonds to their correct present values. These rates would not bring a coupon bond's cash flows back to par.

Yes! The whole idea of an interest rate tree is using the probable future interest rates in various states to discount the cash flows of a coupon bond to its present par value. If no variance was allowed, these cash flows would have to be discounted using a single rate in each period that starts at the one-year rate and moves forward; the only way to accomplish this would be to use forward rates.

par curve.

spot curve.

forward curve.