The Main Difference Between the "Short-Form" and "Forward" Methods of Pricing

question 14

Multiple Choice

The main difference between the "short-form" and "forward" methods of pricing a floating-rate note is:

• A)The short-form method is a computational short cut that is correct on average but may yield higher or lower prices than the forward method.
• B)The short-form method always works well whereas the forward method works well if interest rates are deterministic but not if they are stochastic.
• C)The short-form method requires knowledge of the term-structure of interest rates only out to the next coupon payment whereas the forward method requires knowledge of the entire interest-rate curve out to the maturity of the bond.
• D)The short-form method results in too high a price (relative to the forward method)if the term-structure of interest rates is downward sloping,and too low a price if it is downward sloping.

---

Definitions:

PLC

Programmable Logic Controller, a digital computer used for automation of industrial processes, such as control of machinery or factory assembly lines.

Timing Circuit

An electronic circuit designed to produce specific time delays or to trigger events at precise intervals.

Cascading

In the programming of timers and counters, a technique used to extend the timing or counting range beyond what would normally be available. This technique involves the driving of one timer or counter instruction from the output of another, similar instruction.

Timers

Devices or software tools that measure time intervals, commonly used in industrial control systems to control operations and processes over time.