Zhong asks, “Are there other ways to calculate the arbitrage-free value of a bond?” Goll responds, “Yes, the arbitrage-free value of a bond can also be calculated using a binomial interest rate tree, such as the one in Exhibit 3 below, where the interest rate tree provides a representation of how one-year forward rates evolve based on an interest rate model that identifies factors with unpredictable paths, an interest rate volatility assumption, and where forward rates on the tree are consistent with the current benchmark yield curve
Please explain the bold part of this para
This means that the interest rate tree should be calibrated such that it is able to price govt. securities correctly. If the forward rates on the tree are not consistent with the benchmark yield curve, then it would lead to arbitrage.