All of the following are steps used in applying a Monte Carlo simulation model for valuing a mortgage-backed security (MBS) EXCEPT: A) input potential interest rate paths. B) stipulate the number of paths the analyst is willing accept. C) use the Treasury yield curve for rates. Your answer: C was incorrect. The correct answer was B) stipulate the number of paths the analyst is willing accept. To use Monte Carlo simulation, you do not need to stipulate the number of paths you would be willing to accept. I see why B is the answer, but how is C part of the Monte Carlo Simulation process?
various interest rates would use T yield curve as seed. All bond yields can be expressed as T yield plus the spread for additional risks.
I don’t know what the CFAI materials say, but in general, for MC: the analyst might perhaps want to specify a maximum allowable error (which would determine the number of paths to use), but it’s probably going a bit far to assume the analyst will understand enough about the behavior of the simulation to be able to determine the requisite path count herself.