Explanation:
Model 1 (No-drift model) assumes zero drift and is also called a normal model. Model 2 adds a drift term.
Let's analyze each option:
The question asks for the statement that is NOT true, which is option B.
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Q-78. Model 1 assumes zero drift and is also called a normal model. Model 2 adds a term for drift. Each of the following is true about these two models except for:
A
A weakness of Model 1 is that the short-term rate can become negative.
B
Model 1 implies a term structure that is perfectly flat at the current rate for all maturities, including the long-term rates.
C
Model 2 is more capable of producing an upward-sloping term structure, which is often observed.
D
Model 2 is an equilibrium model, rather than an arbitrage-free model, because no attempt is made to match the term structure closely.