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.

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Definitions:

Supplied Equals Demanded

A market equilibrium condition where the quantity of goods or services produced and offered by sellers matches the quantity that buyers are willing and able to purchase.

Past Income

The amount of money an individual or entity earned in preceding periods, often used for comparative analysis or financial assessment.

Inheritance

Inheritance involves the passing of assets, properties, and debts from the deceased to their heirs or beneficiaries.

Command Economy

An economic system where the government controls all major aspects of production, investment, and distribution.