Quiz # 2

Which of the following statements are true about the Black, Derman and Toy (BDT) One-factor model of yield curve:


(a) It is based on the familiar Poisson process for the short yield;
(b) The model produces a recombining binomial tree;
(c) The model produces a non-recombining binomial tree;
(d) None of the above;




Which of the following statements are true about the Salomon Brothers model of the yield curve:


(a) The model produces a non-recombining binomial tree;
(b) It proceded the Black-Derman-Toy model;
(c) Both the above;
(d) None of the above;




A random process X that can have only two equi-probable outcome u and d such that {u > d > 0} and that has an expected value equal to then the volatility of the process will be given by:


(a) 
(b) 
(c) 
(d) 




Which of the following is not true about the HO and LEE model of yield curve:


(a) It is based on an equal probability tree;
(b) It is a one-factor model;
(c) In this model the one period yield is the only source of volatility and            therefore all the variability of the term structure is driven by the short yield            changes;
(d) Local volatility was stochastic;




Which of the following statements about an Inverse Floater (Inverse Floater Rate Notes) are true:


(a) An inverse FRN has a duration that in fact exceeds its term to maturity;
(b) The price of an inverse floater is very sensitive to the YTM
            (yield to maturity) of the underlying collateral;
(c) The duration of the inverse FRN is much higher than the duration of the            underlying collateral and it increases with YTM (yield to maturity);
(d) None of the above;




An inverse floater is structured by an investment bank using a fixed rate coupon paying bond as the collateral. Using this collateral an FRN and inverse FRN is structured with a 50:50 proportion. The collateral has a duration of 10 years and the current market price of the collateral (i.e. the fixed rate coupon bond ) is 98.00. The Market price of the inverse FRN is 96.00. What is the duration of the inverse FRN.


(a) 20.42 years
(b) 15.56 years
(c) 8.67 years
(d) 9.12 years




If the present value function and the future value are related through the exponential function e in the following way : then the second Derivative of the present value function which respect to the yield, is given by:


(a) 
(b) 
(c) 
(d) 




A 26 step binomial tree will have the following number of paths :


(a) 2²⁴
(b) 2²⁶
(c) 2²⁵
(d) 2²⁷




Within the context of fixed income valuation which of the following statements is true about "Convexity"?


(a) The importance of convexity lies is in the asymmetry between the effect of             the present Value of an increase and a decrease in a yield;
(b)  It is first derivative of the present value with respect to the yield;
(c) The gain from convexity decreases very rapidly with duration;
(d) All of the above;




Which of the following is true about a Cox-Ross-Rubenstein (CRR) binomial tree?


(a) In certain cases the CRR construction can lead to negative probabilities;
(b) The step-standard deviation assumption of can be very             inaccurate when the probability of an up-move deviates from 50%
(c) It is a multiplicative binomial process in which the value of u is the same for            all the nodes of the tree;
(d) All of the above;

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