Q Edward Murray and William Ripken recently examined the accumulated interest, paid in increments of $0.01, that are possible on a 5-year floating-rate bond with a stated floor (minimum interest rate) and cap (maximum interest rate). Murray states that the accumulated interest payments are “an example of a discrete random variable.” Ripken states that the graph of the probability distribution for the accumulated interest payments will be a “series of disconnected points.” Determine whether the statements made by Murray and Ripken are correct? A) Only Murray is correct B) Only Ripken is correct C) Both Murray and Ripken are correct Please explain your answer. I had a question about discrete random variable a few days ago. I’m still having problems with these type of Quant questions. How can I get it???
if the price fluctuated betweenw 1 and 2 with increments of 0.01 then there can be only 100 values , right? 1.01, 1.02 … 1.99,2.00 and when you plot these 100 values you will get disconnected points, not a continuous graph this is important point to understand, first make peace with it. coming back to question :- since there is a cap and a floor on the accumulated interest , say floor is x and cap is y so the accumulated interest would fluctuate between y and x , since increment is 0.01 so we can list the values between y and x just like I did between 1 and 2 above , so finite number of values here , large number but finite, and you can “count” them all so here they represent a discrete distribution and the graph would be set of disconnected points just like above so answer should be C I tried… to explain
B - Only Ripken is correct… I just know that Murray is wrong. The choices are designed that atleast one of them is right.
ov25 Wrote: ------------------------------------------------------- > B - Only Ripken is correct… I just know that > Murray is wrong. The choices are designed that > atleast one of them is right. can’t be B, I know its C by definition of discrete random variable 
Damin, even if the acc interest is paid by .01? I doubt this…
C is the correct answer. I’m just trying to under discrete random variables
I’d agree with gauri and choose C. It’s a discrete random variable not just because it’s bound by the range parameter, but because it’s paid in increments of $.01. This differs from, say, the amount of rainfall for a given year. This amount can be between zero and infinity, with any number of decimal places representing a possible value. My take on the second leg of this question is just using logic. Think of the x-axis of the graph going -.01, 0, .01, etc. The random variable in this question can NEVER be between those numbers, therefore the graph will be disconnected. Hopefully this didn’t just ocnfuse you even more :o/