Explanation:
The Ho-Lee Model is a no-arbitrage model of the term structure of interest rates that incorporates a time-dependent drift term.
Key characteristics of the Ho-Lee Model:
Why option B is correct: The Ho-Lee Model specifically incorporates a constant drift premium to interest rates over time, making it different from models that have time-varying risk premiums or mean reversion characteristics.
Why other options are incorrect:
Ultimate access to all questions.
No comments yet.
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.