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Black-Derman-Toy model

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Black-Derman-Toy model
A one-factor log-normal Interest rate model where the single source of uncertainty is the Short-term rate. The inputs into the model are the observed term structure of Spot Interest rates and their Volatility term structure. The Black-Derman-Toy model, such as the Ho-Lee model, describes the evolution of the entire term structure in a discrete-time Binomial tree framework. The model can be used to price bonds and Interest rate-sensitive securities, though the solutions are not closed-form.
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