What is an arbitrage-free interest-rate model?
What will be an ideal response?
An arbitrage-free interest-rate model is a model that allows one to interpolate the term structure of interest rates from a set of observed market prices at one point in time assuming that one can rely on the market prices used. Thus, in arbitrage-free models, also referred to as
no-arbitrage models, the analysis begins with the observed market price of a set of financial instruments. The financial instruments can include cash market instruments and interest-rate derivatives, and they are referred to as the benchmark instruments or reference set. The underlying assumption is that the benchmark instruments are fairly priced. A random process for the generation of the term structure is assumed. The random process assumes a drift term for interest rates and volatility of interest rates. Based on the random process and the assumed value for the parameter that represents the drift term, a computational procedure is used to calculate the term structure of interest rates (i.e., the spot rate curve) such that the valuation process generates the observed market prices for the benchmark instruments. The model is referred to as
arbitrage-free because it matches the observed prices of the benchmark instruments. In other words, one cannot realize an arbitrage profit by pursuing a strategy based on the value of the securities generated by the model and the observed market price. Non-benchmark instruments are then valued using the term structure of interest rates estimated and the volatility assumed.
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A gain or loss that qualifies for extraordinary treatment on the income statement must have which of the following qualities? I. Unusual in Nature II. Discontinued Segment III. Infrequent in Occurrence IV. Nonoperating in Nature V. Never Occurred
a. I and V b. III and IV c. I and III d. I, II, and III
Why would a blood bank, which pays people for their blood donations and then sells this blood to hospitals, use the name Blood Assurance?
A. Because the assurance dimension of service quality inspires trust and confidence B. Because the assurance dimension of service quality means that the blood donation will be done accurately C. Because the assurance dimension of service quality emphasizes the knowledge of the employees D. Because the assurance dimension of service quality guarantees customer satisfaction E. Because the assurance dimension of service quality negates concerns about tangibles
The three major types of information system architectures include centralized, decentralized and distributed systems architectures
Indicate whether the statement is true or false
Suppose that in addition to the $5.5 million of taxable income from operations, Emily's Flowers, Inc. received $500,000 of interest on state-issued bonds and $300,000 of dividends on common stock it owns in Amy's Iris Bulbs, Inc. Using the tax schedule in Table 2.3 what is Emily's Flowers' income tax liability? What are Emily's Flowers' average and marginal tax rates on total taxable income?
A. $1,972,000, 34%, 34%, respectively B. $2,070,600, 34%, 34%, respectively C. $1,900,600, 34%, 34%, respectively D. $2,142,000, 34%, 34%, respectively