The main difference between the "short-form" and "forward" methods of pricing a floating-rate note is:
A)The short-form method is a computational short cut that is correct on average but may yield higher or lower prices than the forward method.
B)The short-form method always works well whereas the forward method works well if interest rates are deterministic but not if they are stochastic.
C)The short-form method requires knowledge of the term-structure of interest rates only out to the next coupon payment whereas the forward method requires knowledge of the entire interest-rate curve out to the maturity of the bond.
D)The short-form method results in too high a price (relative to the forward method)if the term-structure of interest rates is downward sloping,and too low a price if it is downward sloping.

Question

Quizplus · Accepted Answer

The short-form method only requires knowledge of the term-structure of interest rates out to the next coupon payment, while the forward method requires knowledge of the entire interest-rate curve out to the maturity of the bond. This is the main difference between the two methods. Option A is partially correct, but it is not the main difference. Option B is incorrect because the forward method can still work well even if interest rates are stochastic. Option D is incorrect because it is not always true that the short-form method results in too high or too low a price compared to the forward method.

The Main Difference Between the "Short-Form" and "Forward" Methods of Pricing