It was the first model to combine the mean-reverting behaviour of the short rate with the log-normal distribution,[1] and is still widely used.
A personal account of the development of the model is provided in Emanuel Derman's memoir My Life as a Quant.
[4] Under BDT, using a binomial lattice, one calibrates the model parameters to fit both the current term structure of interest rates (yield curve), and the volatility structure for interest rate caps (usually as implied by the Black-76-prices for each component caplet); see aside.
Using the calibrated lattice one can then value a variety of more complex interest-rate sensitive securities and interest rate derivatives.
Although initially developed for a lattice-based environment, the model has been shown to imply the following continuous stochastic differential equation:[1][5] For constant (time independent) short rate volatility,