- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 32. The Term Structure and Interest Rate Dynamics
- Subject 6. Modern Term Structure Models

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**CFA Practice Question**

The main shortcoming of the Vasicek model is that:

B. The model is one-factor, meaning that there is only one stochastic driver of the process.

C. Interest rates volatility is assumed to be constant, which is not realistic.

A. Interest rates may become negative, although the probability is fairly low.

B. The model is one-factor, meaning that there is only one stochastic driver of the process.

C. Interest rates volatility is assumed to be constant, which is not realistic.

Correct Answer: A

Like the CIR model, the Vasicek model is also a one-factor modeling method. However, the Vasicek model allows for negative interest rates. This is the biggest advantage of the CIR model.

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**User Contributed Comments**
1

User |
Comment |
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JNW1980 |
Why wouldn't this be the other way around? Reality is showing interest rates can indeed be negative. Wouldn't a model that accounts for that be better than one that doesn't all else given equal? |