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

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 solving for discount factors that make the present value of cash flows equal to the bond prices. Linear independence is actually preferred to ensure a unique solution.

Which of the Following Is NOT a Valid Restriction or Deficiency