Reading 54: Term Structure and Volatility of Interest Rates based, between, objective, following, difference

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LOS h: Distinguish between historical yield volatility and implied yield volatility.

Q1. Which of the following is a difference between historical yield volatility and implied yield volatility? Implied yield volatility is:

A)   a more objective measure of the yield volatility.

B)   based on a bond pricing model.

C)   based on an option pricing model.

 

Q2. Which of the following is the most questionable assumption associated with the implied yield volatility metric? Implied yield volatility assumes:

A)   that the bond pricing model used is correct.

B)   that the option pricing model used is correct.

C)   that the yield curve is flat.

 

Q3. To estimate yield volatility, an analyst may use historical yields or an implied yield volatility calculated from current market conditions. Identify the pair of terms below that correctly matches a key ingredient in each estimation process with the process itself.

A)   Historical yield volatility: The standard deviation formula. Implied yield volatility: Derivative prices.

B)   Historical yield volatility: Duration. Implied yield volatility: A series of log ratios of daily rates.

C)   Historical yield volatility: Derivative prices. Implied yield volatility: The standard deviation formula.

elea0930

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danforth

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rosemarie

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mma03

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deqiang

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