An analyst is looking at various models used to incorporate drift into term structure models. The Ho-Lee Model:
A. Incorporates no-risk premium to the interest rate model allowing rates to vary according to their volatility.
B. Incorporates drift as a premium to interest rates that remains constant over time.
C. Allows for a risk premium to be applied to interest rates that changes over time.
D. Incorporates drift into the model following the assumption that rates revert to the long-run equilibrium value.
Answer:C
An analyst is looking at various models used to incorporate drift into term structure models. The Ho-Lee Model:
A. Incorporates no-risk premium to the interest rate model allowing rates to vary according to their volatility. B. Incorporates drift as a premium to interest rates that remains constant over time. C. Allows for a risk premium to be applied to interest rates that changes over time. D. Incorporates drift into the model following the assumption that rates revert to the long-run equilibrium value.
Explanation: Choice c is correct: the Ho-Lee model incorporates a premium to each rate change that can be