Question: What is an equilibrium interest rate model
What is an equilibrium interest-rate model?
Answer to relevant QuestionsWhat are the two drawbacks of the traditional approach to the valuation of bonds with embedded options? Explain how an increase in expected interest-rate volatility can decrease the value of a callable bond. Why is the investor of a callable bond exposed to reinvestment risk? Explain how, given the cash flow on the simulated interest-rate paths, the average life of a RMBS is determined. Using the cash flow yield methodology, a spread is calculated over a comparable Treasury security. How is a comparable Treasury determined?
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