Reading 54: Term Structure and Volatility of Interest Rates issues, principal, following, advantages

youzizhang

 

LOS c: Explain the various universes of Treasury securities that are used to construct the theoretical spot rate curve, and evaluate their advantages and disadvantages.

Q1. Which of the following Treasury issues is typically NOT a candidate used to construct the theoretical spot rate curve?

A)Treasury principal strips.

B)Treasury coupon strips.

C)All Treasury coupon securities and bills.

 

Q2. Which of the following is a disadvantage of using all of the Treasury coupon securities to construct the theoretical spot rate curve?

A)   The spot rate curve will be overfitted.

B)   Real-time information is not available for all issues.

C)   The off-the-run Treasury securities tend to be mispriced.

 

Q3. To construct a theoretical spot-rate curve using Treasury securities, the class of securities that provides the most accurate prices but has the disadvantage of large maturity gaps is:

A)   strips.

B)   on-the-run securities.

C)   off-the-run securities.

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