A One-Factor Bond Pricing Model Implies That Interest-Rates of All $d r ( T ) = \alpha ( r ( T ) , T ) d t + \sigma ( r ( T ) , T ) d W , \quad \forall T$

question 6

Multiple Choice

A one-factor bond pricing model implies that interest-rates of all maturities are driven by a single source of stochastic randomness.For example the system of interest rates may be described by the following equation: $d r ( T ) = \alpha ( r ( T ) , T ) d t + \sigma ( r ( T ) , T ) d W , \quad \forall T$ where $T$ denotes the maturity of different rates.A single-factor model implies that

• A)All rates either move up together or all move down together.
• B)The yield curve experience parallel shifts.
• C)Instantaneous changes in rates of all maturities are perfectly positively or negatively correlated with each other.
• D)Twists in shape of the yield curve are not possible.

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Definitions:

Moss Kanter

Rosabeth Moss Kanter, a professor at Harvard Business School known for her work on change management and organizational behavior.

Powerlessness

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