Correct Answer: C

An arbitrage-free binomial lattice is calibrated to match the current zero-coupon yield curve. This calibration ensures that the binomial tree produces the same prices for zero-coupon bonds as the spot rate curve. Therefore, when pricing an option-free bond using either method, the resulting price should be identical.

Why other options are incorrect:

• A: Both methods do not use the bond coupon as the discount rate. The zero-coupon yield curve uses spot rates, and the binomial tree uses forward rates derived from the spot curve.
• B: Interest rate volatility is applied in the binomial lattice but not in the zero-coupon yield curve method. The zero-coupon yield curve method assumes no volatility.