Suppose that a support bond is being analyzed using the Monte Carlo simulation methodology. The theoretical value using 1,500 interest-rate paths is 88 . The range for the path present values is a low of 50 and a high of 115
The standard deviation is 15 points. How much confidence would you place on the theoretical value of 88?
The probability of actually achieving a theoretical value of 88 is not very likely. However, we can put a probability of occurrence for a range of values surrounding 88 . For example, if we can assume a distribution resembling a normal distribution, then we know there is about a two-thirds probability that we will find a range of values between 73 and 103 . Nevertheless, given the range of low and high values it appears the distribution is not perfectly normal but skewed to the left, thus taking on more values below 88 than above 88.
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