Deck 23: Removing Interest Rate Risk

Question 1

The most important intermediate term interest rate futures contract is on

A) treasury bills
B) Eurodollars
C) treasury notes
D) treasury bonds

Answer 1

treasury notes

Question 2

A Eurodollar is a dollar-denominated deposit

A) outside the United States
B) in Europe
C) in Europe or Canada
D) in Europe, Asia, or the Pacific Basin

Answer 2

outside the United States

Question 3

A $10,000 6-month T-bill sells for $9,800. What is its annualized yield to maturity?

A) 2.04%
B) 4.08%
C) 6.12%
D) 6.66%

Answer 3

4.08%

Question 4

A T-bill futures contract calls for the delivery of

A) $100,000 of 60 day T-bills
B) $100,000 of 90 day T-bills
C) $1 million of 60 day T-bills
D) $1 million of 90 day T-bills

Question 5

If someone had a need to lock in a short-term interest rate, they would be most likely to

A) buy T-bill futures
B) sell T-bill futures
C) buy T-note futures
D) sell T-note futures

Question 6

Treasury bonds

A) are not callable
B) may be callable after 10 years
C) may be callable after 15 years
D) are always callable after 5 years

Question 7

An adjustment factor is used to convert a T-bond to a bond yielding

A) 5%
B) 6%, a decline from the former 8% level
C) 8%, an increase from the former 7% level
D) 9%

Question 8

Which is the correct formula for invoice price?

A) (settlement price/conversion factor) - accrued interest
B) (settlement price * conversion factor) + accrued interest
C) (settlement price/conversion factor) + accrued interest
D) (settlement price * conversion factor) - accrued interest

Question 9

When long-term interest rates are above 6%, the cheapest to deliver bond has

A) the highest duration
B) the lowest duration
C) duration equal to 15.0
D) the highest yield to maturity

Question 10

Immunization strategies deal mostly with

A) credit risk
B) market risk
C) convenience risk
D) interest rate risk

Question 11

In a bullet immunization application, the manager seeks to get ___________ to cancel out.

A) interest rate risk and reinvestment rate risk
B) interest rate risk and default risk
C) convenience risk and price risk
D) reinvestment rate risk and default risk

Question 12

If interest rates are expected to rise, the portfolio manager might logically

A) raise duration
B) lower duration
C) lower average yield
D) lower average bond rating

Question 13

A bank's funds gap equals

A) the extent to which asset duration exceeds liability duration
B) total assets minus total liabilities
C) total assets minus current liabilities
D) rate sensitive assets minus rate sensitive liabilities

Question 14

Banks usually make duration adjustments by

A) altering the left side of the balance sheet
B) altering the right side of the balance sheet
C) altering both sides of the balance sheet
D) altering only the equity account

Question 15

Disadvantages of immunization include all of the following except

A) cost of being wrong
B) it only works for long-term investment horizons
C) transactions costs
D) it reduces the portfolio yield

Question 16

Suppose a $10,000 Treasury Bill with 82 days left until maturity is quoted at an asking bank discount rate of 3.20%. What would be the price of this Treasury Bill?

A) $9,727
B) $9,866
C) $9,927
D) $10,000

Question 17

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the asking bank discount yield?

A) 2.3%
B) 2.8%
C) 3.3%
D) 3.8%

Question 18

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the asking bond equivalent yield?

A) 2.36%
B) 2.86%
C) 3.36%
D) 3.86%

Question 19

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the compounded effective annual rate?

A) 2.39%
B) 2.89%
C) 3.39%
D) 3.89%

Question 20

Suppose a Treasury Bill futures contract is quoted at a settlement price of 96.45 percent of par. If two months from now the futures price is quoted at 95.45 percent of par, what would be the gain or loss for a long Treasury Bill futures position over this period?

A) -$2,550
B) -$2,450
C) $2,450
D) $2,550

Question 21

Suppose you are managing a bond portfolio with a current market value of $4.6 million. The bonds in this portfolio are priced at an average price of 98% of par and the duration of the portfolio is 12.62 years. If the cheapest to deliver bond for a Treasury Bond futures contract has a duration of 13.22 years, is priced at 97.5% of par, and has a conversion factor of 0.8315, what is the hedge ratio for using this Treasury Bond futures contract?

A) 1.0773
B) 0.9373
C) 0.8664
D) 0.7978

Question 22

Suppose you are managing a bond portfolio with a current market value of $4.6 million. The bonds in this portfolio are priced at an average price of 98% of par and the duration of the portfolio is 12.62 years. If the cheapest to deliver bond for a Treasury Bond futures contract has a duration of 13.22 years, is priced at 97.5% of par, and has a conversion factor of 0.8315, how many Treasury Bond futures contracts would represent a 100% hedge?

A) Long 37 contracts
B) Long 57 contracts
C) Short 37 contracts
D) Short 57 contracts