Question 1

Explain the intuition behind the link between high long term yields and higher expected long term inﬂation.

Accepted Answer

Higher expected inﬂation means that cash balances from long term bonds will be worth less. In order to counter this, market participants expect higher yields.

Question 2

What problem does the "delta" approximation have?

Accepted Answer

If the convexity of the security is particularly strong this approximation may yield quite diﬀerent results.

Question 3

What factors explain long term yields?

Accepted Answer

The following explain long term yields: i. Higher expected long term in?ation. ii. Higher risk aversion of market participants.   iii. Higher amount of risk.

Question 4

On what does λ depend?

Accepted Answer

The market price of risk depen

Question 5

Explain the intuition behind the link between high long term yields and higher amount of risk.

Accepted Answer

A higher amount of risk pushes

Question 6

What is the "delta" approximation?

Accepted Answer

The answer of What is the "delta" approximation?...

Question 7

Explain the intuition behind the link between high long term yields and higher risk aversion of market participants.

Accepted Answer

As risk aversion increases, ma

Question 8

You are planning to use Monte Carlo Simulations in order to simulate an interest rate one quarter from now. Which probability do you use?

Accepted Answer

You use ri

Question 9

How do we deﬁne the market price of risk?

Accepted Answer

The answer of How do we deﬁne the market price...

Question 10

You are planning to use Monte Carlo Simulations in order to compute the value of the range ?oater for di?erent scenarios. Which type of probability do you use?

Accepted Answer

You use ri

Question 11

How do we go from Monte Carlo Simulations to security prices?

Accepted Answer

We use the Feynman-Kac theorem that stat

Explain the intuition behind the link between high long term yields and higher expected long term inﬂation.

What problem does the "delta" approximation have?

What factors explain long term yields?

On what does λ depend?

Explain the intuition behind the link between high long term yields and higher amount of risk.

What is the "delta" approximation?

Explain the intuition behind the link between high long term yields and higher risk aversion of market participants.

You are planning to use Monte Carlo Simulations in order to simulate an interest rate one quarter from now. Which probability do you use?

How do we deﬁne the market price of risk?

You are planning to use Monte Carlo Simulations in order to compute the value of the range ?oater for di?erent scenarios. Which type of probability do you use?

How do we go from Monte Carlo Simulations to security prices?

An Introduction to Fixed Income Markets

Basics of Fixed Income Securities

Basics of Interest Rate Risk Management

Basic Refinements in Interest Rate Risk Management

Interest Rate Derivatives: Forwards and Swaps

Interest Rate Derivatives: Futures and Options

Inflation, Monetary Policy, and the Federal Funds Rate

Basics of Residential Mortgage Backed Securities

One Step Binomial Trees

Multi-Step Binomial Trees

Risk Neutral Trees and Derivative Pricing

American Options

Monte Carlo Simulations on Trees

Interest Rate Models in Continuous Time

No Arbitrage and the Pricing of Interest Rate Securities

Dynamic Hedging and Relative Value Trades

Dynamic Hedging and Relative Value Trades

No Arbitrage Models and Standard Derivatives

The Market Model for Standard Derivatives

Forward Risk Neutral Pricing and the Libor Market Model

Multifactor Models

Filters

Exam 18: The Risk and Return of Interest Rate Securities

Explain the intuition behind the link between high long term yields and higher expected long term inﬂation.

What problem does the "delta" approximation have?

What factors explain long term yields?

On what does λ depend?

Explain the intuition behind the link between high long term yields and higher amount of risk.

What is the "delta" approximation?

Explain the intuition behind the link between high long term yields and higher risk aversion of market participants.

You are planning to use Monte Carlo Simulations in order to simulate an interest rate one quarter from now. Which probability do you use?

How do we deﬁne the market price of risk?

You are planning to use Monte Carlo Simulations in order to compute the value of the range ?oater for di?erent scenarios. Which type of probability do you use?

How do we go from Monte Carlo Simulations to security prices?

An Introduction to Fixed Income Markets

Basics of Fixed Income Securities

Basics of Interest Rate Risk Management

Basic Refinements in Interest Rate Risk Management

Interest Rate Derivatives: Forwards and Swaps

Interest Rate Derivatives: Futures and Options

Inflation, Monetary Policy, and the Federal Funds Rate

Basics of Residential Mortgage Backed Securities

One Step Binomial Trees

Multi-Step Binomial Trees

Risk Neutral Trees and Derivative Pricing

American Options

Monte Carlo Simulations on Trees

Interest Rate Models in Continuous Time

No Arbitrage and the Pricing of Interest Rate Securities

Dynamic Hedging and Relative Value Trades

Dynamic Hedging and Relative Value Trades

No Arbitrage Models and Standard Derivatives

The Market Model for Standard Derivatives

Forward Risk Neutral Pricing and the Libor Market Model

Multifactor Models

Filters