Explanation:
The change in the term structure would be proportional. Therefore, all rates would increase by 20 basis points.
Things to Remember
Ultimate access to all questions.
No comments yet.
Q.1654 The simplest model of term structuring is Model 1. This model’s term structure is downward sloping, because it has no drifts and the rates decline uniquely with term. The major aspect of this model is the factor structure and the only factor of this model is the short-term rate. Now, suppose this short-term rate increases by 20 basis points compounded semi-annually. What will be the impact on the term structure?
A
Volatility will increase by 20 basis points because of an increase in the short-term rate.
B
Convexity will increase by 20 basis points because of an increase in the short-term rate.
C
Rates will increase by 20 basis points because of an increase in the short-term rate.
D
Maturity will increase by 20 basis points because of an increase in the short-term rate.