Deck 7: Interest Rate Forwards and Futures

Question 1

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?

A) 5.02%
B) 5.43%
C) 5.81%
D) 6.06%

Answer 1

D

Question 2

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 continuously compounded 3-year zero yield?

A) 5.35%
B) 5.85%
C) 6.12%
D) 6.40%

Answer 2

A

Question 3

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?

A) 4.6%
B) 5.5%
C) 5.8%
D) 6.7%

Answer 3

D

Question 4

What is the pure yield curve and why is it common to present coupon-based yield curves in practice?

Question 5

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?

A) 0.10%
B) 0.20%
C) 0.30%
D) 0.40%

Question 6

A 4-year bond with a price of 100.696 exists.The duration on the bond is 3.674.If the yield rises from 5.8% to 6.2%,what is the new bond price as estimated by the duration?

A) $98.40
B) $99.30
C) $100.60
D) $101.40

Question 7

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?

A) Borrow one 150-day bond and invest in 1.02 of the 310-day bonds
B) Borrow two 150-day bonds and invest in 0.98 of the 310-day bonds
C) Lend one of the 150-day bonds and borrow 1.02 of the 310-day bonds
D) Lend two of the 150-day bonds and borrow 0.98 of the 310-day bonds

Question 8

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?

A) 4.6%
B) 5.5%
C) 5.8%
D) 6.7%

Question 9

A Forward Rate Agreement contains an agreed interest rate of 3.1% on a 6-month loan.If settled at the time of borrowing,what amount would the borrower pay or receive on a $500,000 loan if the prevailing 6-month interest rate is 2.9%?

A) $1,000 payment
B) $1,000 receipt
C) $972 payment
D) $972 receipt

Question 10

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?

A) 5.45%
B) 5.50%
C) 5.75%
D) 5.81%

Question 11

Compute the conversion factor on a semi-annual 6.8% coupon bond,which matures in exactly 5 years.

A) 1.037
B) 1.046
C) 1.052
D) 1.068

Question 12

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?

A) 4.6%
B) 5.5%
C) 5.8%
D) 6.7%

Question 13

Explain the expectations hypothesis and its ability to accurately forecast interest rates.

Question 14

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 continuously compounded yield on a 2-year zero coupon bond?

A) 5.55%
B) 5.65%
C) 5.75%
D) 5.85%

Question 15

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%?

A) 2.779
B) 2.634
C) 2.535
D) 2.442

Question 16

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?

A) 1.8%
B) 2.0%
C) 2.9%
D) 3.8%

Question 17

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?

A) 4.8%
B) 5.2%
C) 5.5%
D) 6.4%

Question 18

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?

A) +0.08
B) -0.08
C) -0.02
D) +0.02

Question 19

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%?

A) $4,000 payment
B) $4,000 receipt
C) $1,729 payment
D) $1,729 receipt

Question 20

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?

A) $8,500
B) $10,500
C) $13,500
D) $15,500

Question 21

What is the rationale behind cheapest-to-deliver calculations and why do we perform such calculations?

Question 22

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.

Question 23

Why can repos be used to simulate borrowing?

Question 24

Explain the process of creating a synthetic Forward Rate Agreement.