Explanation:

• Option A is incorrect: Monte Carlo simulation is actually very appropriate for securities with path-dependent cash flows, such as mortgage-backed securities or callable bonds, where future cash flows depend on the path of interest rates.

• Option B is incorrect: While increasing the number of paths generally improves accuracy, there's a point of diminishing returns, and the model may not necessarily converge to the "fundamental value" due to model limitations and assumptions.

• Option C is correct: Monte Carlo simulation for bond valuation requires:

  • A probability distribution for interest rates
  • Volatility assumptions to model the randomness of interest rate paths
  • These inputs are essential to generate multiple interest rate scenarios for valuation.