CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following is an advantage of the arbitrage-free valuation approach to valuing fixed income securities, relative to the traditional valuation approach?

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
Correct Answer: B

The arbitrage-free valuation approach applies time-appropriate spot interest rates to each cash flow of the bond.

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.
You need to log in first to add your comment.