Chat with AIExam 7: Interest Rate Forwards and Futures
The price of a 3-year zero coupon government bond is 85.16.The price of a similar 4-year bond is 78.81.What is the 1-year implied forward rate from year 3 to year 4?
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The price of a 3-year zero coupon government bond is 85.16.The price of a similar 4-year bond is 78.81.What is the yield to maturity (effective annual yield)on the 3-year bond?
(40) VerifiedB
How is duration calculated? What is the nature and use of duration? How does duration compare to the linear concept of the bond price and interest rate relationship? Is duration better than convexity or worse? Duration is considered common knowledge in the fixed income world and should be discussed at length.
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Answered by Examlex AI CopilotDuration is a measure of the sensitivity of a bond's price to changes in interest rates. It is calculated as the weighted average of the present value of the bond's cash flows, with the weights being the time to receipt of each cash flow. In simpler terms, duration measures the time it takes for an investor to recoup the bond's price through its coupon payments and principal repayment.
The nature of duration is that it provides a way for investors to gauge the interest rate risk associated with a bond. It helps investors understand how much the price of a bond will change in response to a change in interest rates. Duration is also used to compare the interest rate risk of different bonds and to manage a portfolio's overall interest rate risk exposure.
Duration is different from the linear concept of the bond price and interest rate relationship in that it takes into account the timing of the bond's cash flows. This means that duration provides a more accurate measure of a bond's price sensitivity to changes in interest rates compared to a simple linear relationship.
In comparison to convexity, duration is a simpler and more widely used measure of interest rate risk. While duration provides a good estimate of a bond's price sensitivity to interest rate changes, convexity provides additional information about the curvature of the price-yield relationship. In general, duration is considered better than convexity for most practical purposes, as it is easier to understand and use in portfolio management.
In conclusion, duration is a crucial concept in the fixed income world as it helps investors and portfolio managers understand and manage interest rate risk. It is a widely used measure that provides valuable insights into the relationship between bond prices and interest rates, and it is an essential tool for making informed investment decisions in the fixed income market.
Explain the expectations hypothesis and its ability to accurately forecast interest rates.
(32) What is the rationale behind cheapest-to-deliver calculations and why do we perform such calculations?
(34) The conversion factor on a deliverable bond is 1.03 and the bond price is 100.50.The observed futures price is 97.5 and the YTM is 5.8%.What is invoice less market price on the security?
(32) The price of a 3-year zero coupon government bond is 85.16.The price of a similar 4-year bond is 79.81.What is the yield to maturity (effective annual yield)on the 4-year bond?
(37) The price of a 6-month T-bill is 96.73.You wish to enter into a repurchase agreement that provides for your purchase of a $100,000 bond in 10 days at a price of 97.02.What is the implied 10 day repo rate in this transaction?
(32) The annual coupon rate on a 1-year treasury bond is 5.5%.The coupon on a 2-year treasury bond is 5.8%.What is the implied YTM on a hypothetical 2-year zero coupon treasury bond?
(41) What is the pure yield curve and why is it common to present coupon-based yield curves in practice?
(39) The prices of 1,2,3,and 4-year zero coupon government bonds are 95.42,90.36,85.16,and 78.81,respectively.What is the implied 2-year forward rate between years 2 and 4?
(40) You wish to create a synthetic forward rate agreement in which you would lock in a return between 150 and 310 days.The price of a 150-day zero coupon bond is 0.9823 and the price of 310-day zero coupon bond is 0.9634.What are the transactions used to create this instrument?
(41) A Forward Rate Agreement contains an agreed interest rate of 3.1% on a 6-month loan.If settled in arrears,what amount would the borrower pay or receive on an $800,000 loan if the prevailing 6-month interest rate is 3.6%?
(29) Compute the conversion factor on a semi-annual 6.8% coupon bond,which matures in exactly 5 years.
(42) Two months from today you plan to borrow $3 million for 6 months at LIBOR.You hedge your interest rate risk with a euro dollar futures contract priced at 93.6.If settled in arrears,what is your payment if the 6-month LIBOR is 2.5% in two months?
(36) You wish to create a synthetic forward rate agreement in which you would lock in a return between 150 and 310 days.The price of a 150-day zero coupon bond is 0.9823 and the price of 310-day zero coupon bond is 0.9634.What is the approximate yield on the synthetic FRA?
(32) The prices of 1,2,3,and 4-year zero coupon government bonds are 95.42,90.36,85.16,and 78.81,respectively.What is the par coupon on a 4-year coupon bond selling at par?
(28) Given a 3-year,8.0% annual coupon bond with a par value of $1,000,what is the bond's Macaulay duration if the yield to maturity is 9.5%?
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