Deck 4: Interest Rates

Question 1

The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded.

A) 6.75%
B) 7.0%
C) 7.25%
D) 7.5%

Answer 1

D

Question 2

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

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

Answer 2

D

Question 3

Which of the following is true of LIBOR?

A) The LIBOR rate is free of credit risk
B) A LIBOR rate is lower than the Treasury rate when the two have the same maturity
C) It is a rate used when borrowing and lending takes place between banks
D) It is subject to favorable tax treatment in the U.S.

Answer 3

C

Question 4

The six month and one-year rates are 3% and 4% per annum with semiannual compounding. Which of the following is closest to the one-year par yield expressed with semiannual compounding?

A) 3.99%
B) 3.98%
C) 3.97%
D) 3.96%

Question 5

Bootstrapping involves

A) Calculating the yield on a bond
B) Working from short maturity instruments to longer maturity instruments determining zero rates at each step
C) Working from long maturity instruments to shorter maturity instruments determining zero rates at each step
D) The calculation of par yields

Question 6

The six-month zero rate is 8% per annum with semiannual compounding. The price of a one-year bond that provides a coupon of 6% per annum semiannually is 97. What is the one-year continuously compounded zero rate?

A) 8.02%
B) 8.52%
C) 9.02%
D) 9.52%

Question 7

Which of following describes forward rates?

A) Interest rates implied by current zero rates for future periods of time
B) Interest rate earned on an investment that starts today and last for n-years in the future without coupons
C) The coupon rate that causes a bond price to equal its par (or principal) value
D) A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows

Question 8

The zero curve is upward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the following is true?

A) X is less than Y which is less than Z
B) Y is less than X which is less than Z
C) X is less than Z which is less than Y
D) Z is less than Y which is less than X

Question 9

A repo rate is

A) An uncollateralized rate
B) A rate where the credit risk is relatively high
C) The rate implicit in a transaction where securities are sold and bought back at a higher price
D) None of the above

Question 10

Given a choice between 5-year and 1-year instruments most people would choose 5-year instruments when borrowing and 1-year instruments when lending. Which of the following is a theory consistent with this observation?

A) Expectations theory
B) Market segmentation theory
C) Liquidity preference theory
D) Maturity preference theory

Question 11

An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding?

A) 11.83%
B) 11.66%
C) 11.77%
D) 11.92%

Question 12

Since the credit crisis that started in 2007 which of the following have derivatives traders started to use as the risk-free rate for some transactions?

A) The Treasury rate
B) The LIBOR rate
C) The repo rate
D) The overnight indexed swap rate

Question 13

Which of the following is true?

A) When interest rates in the economy increase, all bond prices increase
B) As its coupon increases, a bond's price decreases
C) Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same
D) None of the above

Question 14

Prior to the credit crisis that started in 2007 which of the following was the proxy used by derivatives traders for the risk-free rate?

A) The Treasury rate
B) The LIBOR rate
C) The repo rate
D) The overnight indexed swap rate

Question 15

The yield curve is flat at 6% per annum. What 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 $1,000 starting in two years? All rates are compounded semiannually.

A) $9.12
B) $9.02
C) $8.88
D) $8.63

Question 16

The zero curve is downward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the following is true?

A) X is less than Y which is less than Z
B) Y is less than X which is less than Z
C) X is less than Z which is less than Y
D) Z is less than Y which is less than X

Question 17

An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding?

A) 5.06%
B) 5.03%
C) 4.97%
D) 4.94%

Question 18

At what interest rate does a government borrow in its own currency?

A) Treasury rate
B) LIBOR
C) LIBID
D) Repo rate

Question 19

An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding?

A) 5.79%
B) 6.21%
C) 5.83%
D) 6.18%

Question 20

The compounding frequency for an interest rate defines

A) The frequency with which interest is paid
B) A unit of measurement for the interest rate
C) The relationship between the annual interest rate and the monthly interest rate
D) None of the above