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Basic Question 1 of 7
Which of the following is an advantage of the arbitrage-free valuation approach to valuing fixed income securities, relative to the traditional valuation approach?
B. The valuation of individual cash flows based on specific spot rates
C. The specification of a single spot rate curve which is used to derive the current value of the bond
D. The automatic adjustment for changes in cash flows due to embedded options
A. The adjustment for semi-annual compounding of interest
B. The valuation of individual cash flows based on specific spot rates
C. The specification of a single spot rate curve which is used to derive the current value of the bond
D. The automatic adjustment for changes in cash flows due to embedded options
User Contributed Comments 3
| User | Comment |
|---|---|
| Victorialy | Arbitrage free valuation applies spot rates to CF of bond |
| maryprz14 | But this is a characteristic or feature of arbitrage-free, not an advantage! |
| khalifa92 | the price calculated from spot rates and yield to maturity don't match there will be an arbitrage opportunity. |
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Barnes
Learning Outcome Statements
explain what is meant by arbitrage-free valuation of a fixed-income instrument;
calculate the arbitrage-free value of an option-free, fixed-rate coupon bond;
CFA® 2025 Level II Curriculum, Volume 4, Module 27.