In the cubic splines technique,which of the following is a benefit of adding more knot points to the algorithm?
A)It enhances the smoothness of the forward curve obtained from the fitted function.
B)It makes implementation easier as the number of parameters increases.
C)It increases flexibility in being able to fit a greater variety of shapes for the discount function.
D)It enables fitting the curve to more bonds and allows incorporating illiquid bonds as well.

Question

Quizplus · Accepted Answer

More knot points reduces smoothness and makes the fitted curve more jagged-hence (a)is not valid.Implementation becomes more complex as the number of equations and parameters increases,though not by much-so (b)is not valid.More allowable knots points offers more flexible fit-(c)is valid.Incorporating illiquid bonds may not be a good thing,as it might bias the fit away from the more informative bonds that are liquid,i.e. ,(d)is not valid.Illiquid bonds may add more noise than signal to the fit.

In the Cubic Splines Technique,which of the Following Is a Benefit