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

question 6

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:

Stereotypes

Oversimplified and generalized beliefs about a group of people that neglect individual differences and can lead to prejudice and discrimination.

Client Groups

Specific categories of clients grouped together based on shared characteristics or needs within a professional context.

Mainstream Media

Widely disseminated media outlets, including television, radio, newspapers, and magazines, that reach a large audience.

Assumptions

Beliefs or ideas taken for granted without verification, often serving as a foundation for decision-making and behavior.