Deck 4: Interest Rates

Question 1

The yield curve is flat at 6% per annum with semi-annual compounding. What to the nearest cent) is the value of an FRA where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1000 starting in two years? _ _ _ _ _ _

Answer 1

$8.63

Question 2

An interest rate is 15% per annum when expressed with annual compounding. What is the equivalent rate with continuous compounding? Answer as a per cent with two decimal places. _ _ _ _ _ _

Answer 2

13.98%

Question 3

The six-month zero rate is 8% with semi-annual compounding. The price of a one-year bond that provides a coupon of 6% per annum semi-annually is 97. What is the one-year continuously compounded zero rate? Answer as a per cent with two decimal places. _ _ _ _ _ _

Answer 3

9.02%

Question 4

A company will pay 4.5% per annum on a principal of AUD$200 million over the period of 180 days. The forward rate is 5.2% per annum in this Australian dollar Forward Rate Agreement FRA). Calculate the value of this FRA from the perspective of the company using Australian convention. All the rates given in this question are continuously compounded. ________

Question 5

The short term risk-free rate usually used by derivatives traders in the over-the-counter market is: choose one)

A) The Treasury rate
B) The LIBOR rate
C) The repo rate
D) The commercial paper rate

Question 6

An interest rate is 8% per annum when expressed with continuous compounding. What is the equivalent annual rate with semi-annual compounding? Answer as a per cent with two decimal places. _ _ _ _ _ _

Question 7

When the zero curve is upward sloping, which two of the following is true? choose two)

A) The one-year zero rate is always greater than the forward rate for the period between 1 year and 1.5 years.
B) The one-year zero rate is always less than the forward rate for the period between 1 year and 1.5 years.
C) The one-year par yield is always greater than the one-year zero rate.
D) The one-year par yield is always less than the one-year zero rate.

Question 8

The three-year zero rate is 7% and the four-year zero rate is 7.5% both continuously compounded). What is the forward rate for the fourth year with continuous compounding? Answer as a per cent with two decimal places._ _ _ _ _ _

Question 9

Under liquidity preference theory, which of the following is always true? choose one)

A) The forward rate is higher than the spot rate when both have the same maturity.
B) Forward rates are unbiased predictors of expected future spot rates.
C) The spot rate for a certain maturity is higher than the par yield for that maturity.
D) Forward rates are higher than expected future spot rates.

Question 10

An interest rate is 12% when expressed with quarterly compounding. What is the equivalent annual rate with semi-annual compounding? Answer as a per cent with two decimal places. _ _ _ _ _ _