Question 1

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?

Accepted Answer

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

Question 2

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.

Accepted Answer

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

Question 3

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?

Accepted Answer

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

Question 4

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?

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

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

Question 8

Bootstrapping involves

Accepted Answer

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 
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 9

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?

Accepted Answer

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 
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 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

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 
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 12

The compounding frequency for an interest rate defines

Accepted Answer

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 
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

Question 13

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?

Accepted Answer

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 
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 14

Which of the following is true of LIBOR?

Accepted Answer

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. 
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.

Question 15

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?

Accepted Answer

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

Question 16

Which of the following is true?

Accepted Answer

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 
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 17

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?

Accepted Answer

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

Question 18

A repo rate is

Accepted Answer

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 
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 19

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.

Accepted Answer

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

Question 20

Which of following describes forward rates?

Accepted Answer

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 
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

Exam 4: Interest Rates

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?

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.

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?

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?

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

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

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

Bootstrapping involves

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?

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

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

The compounding frequency for an interest rate defines

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?

Which of the following is true of LIBOR?

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?

Which of the following is true?

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 repo rate is

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.

Which of following describes forward rates?

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Bsm Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

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