Use of all treasury coupon securities current, correct, following, available

sabaruch

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

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

B) The spot rate curve will be overfitted.

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






The correct answer was A.

A disadvantage of using all Treasury securities and bills to develop the theoretical spot rate curve is that current information is not available for all issues.



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A looks right but C doesnt look bad either. Page 177 Schweser Book 4 says a disadvantage of using all treasury coupon securities is "current prices may not reflect accurate interest rates for all maturities", which sounds like C. it does also say "current information is not available for all issues" which concides with choice A. is there anything that makes A more right than C?

tarunajwani

Argument against C:

Off-the-run securities are not so liquid as on-the-run securities. So, lesser liquidity is reflected in their price.

So, we cannot say they are MISPRICED, as their prices are reflecting Interest Rates and also the lower liquidity.

Uranus08

thanks i guess that makes sense. they're not mispriced, just skewed due to the interest rate and liquidity differently. but the prices arent wrong per say.

on the other hand it is true that real time info is not available since you cant get info on every single on and off hthe run security.