Which of the following is NOT a valid restriction or deficiency of the bootstrap method of estimating the discount function?
A)The method requires that all bonds have cashflows on the same dates.
B)If bond cash flows are written as arrays (i.e. ,as $\left( c _ { 1 } , c _ { 2 } , \ldots \right)$
On the chosen dates
$t _ { 1 } , t _ { 2 } , \ldots$,the method requires that the cash flow arrays of bonds used in estimating the discount function be linearly dependent.
C)It requires choosing specific bonds on each date and is sensitive to the choice of bonds.
D)After bootstrapping,It is difficult to value bonds that have cashflows on dates that are in between discount function maturities.

Question

Which of the following is NOT a valid restriction or deficiency of the bootstrap method of estimating the discount function?
A)The method requires that all bonds have cashflows on the same dates.
B)If bond cash flows are written as arrays (i.e. ,as $\left( c _ { 1 } , c _ { 2 } , \ldots \right)$
On the chosen dates
 $t _ { 1 } , t _ { 2 } , \ldots$,the method requires that the cash flow arrays of bonds used in estimating the discount function be linearly dependent.
C)It requires choosing specific bonds on each date and is sensitive to the choice of bonds.
D)After bootstrapping,It is difficult to value bonds that have cashflows on dates that are in between discount function maturities.

Quizplus · Accepted Answer

The bootstrap method does not require that the cash flow arrays of bonds used in estimating the discount function be linearly dependent. Instead, it relies on the assumption that the cash flows are linearly independent to solve for the discount rates. Linear dependence would imply redundancy among the bonds, which is not a requirement or characteristic of the bootstrap method.

Which of the Following Is NOT a Valid Restriction or Deficiency