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.

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