Which of the following statements best characterizes the differences between the Ho-Lee model with drift and the lognormal model with drift?
A. In the Ho-Lee model and the lognormal model the drift terms are multiplicative.
B. In the Ho-Lee model and the lognormal model the drift terms are additive
C. In the Ho-Lee model the drift terms are multiplicative, but in the lognormal model the drift terms are additive
D. In the Ho-Lee model the drift terms are additive, but in the lognormal model the drift terms are multiplicative.
Answer:D
The Ho-Lee model with drift is very flexible, allowing the drift terms each period to vary. Hence, the cumulative effect is additive. In contrast, the lognormal model with drift allows the drift terms to vary, but the cumulative effect is multiplicative.