In the Ho & Lee (1986) Model, Assume That the Initial

question 14

Multiple Choice

In the Ho & Lee (1986) model, assume that the initial curve of zero-coupon discount bond prices for one and two years is $0.9434$ and $0.8734$ , respectively. Assume that the probability of an upshift in discount functions is equal to that of a downshift. If the parameter $\delta = 0.95$ , then the price of a one-year zero-coupon bond in the up node after one year will be

• A) 0.9282
• B) 0.9496
• C) 0.9563
• D) 0.9678

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Definitions:

Market Price

The current value at which a good or service can be bought or sold in a given market.

Short-Run Equilibrium

A state in which supply equals demand within a particular market, specifically under the assumption that some conditions (like input prices) are fixed in the short term.

Marginal Cost

The charge for the production of one more unit of a product or service.

Marginal Revenue

The enhanced earnings a firm receives from offloading an extra unit of a good or service.