Question 1

A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zero-coupon bond.What is the duration of the portfolio?

Accepted Answer

A) 6 years 
B) 7 years 
C) 8 years 
D) 9 years 
A) 6 years 
B) 7 years 
C) 8 years 
D) 9 years D

Question 2

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% C

Question 3

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% A

Question 4

A repo rate is

Accepted Answer

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

Question 5

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 6

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 7

Which of the following is true of the fed funds rate

Accepted Answer

A) It is the same as the Treasury rate 
B) It is an overnight interbank rate 
C) It is a rate for which collateral is posted 
D) It is a type of repo rate 
A) It is the same as the Treasury rate 
B) It is an overnight interbank rate 
C) It is a rate for which collateral is posted 
D) It is a type of repo rate

Question 8

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 9

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 10

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 11

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 12

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 13

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 14

The modified duration of a bond portfolio worth $1 million is 5 years.By approximately how much does the value of the portfolio change if all yields increase by 5 basis points?

Accepted Answer

A) Increase of $2,500 
B) Decrease of $2,500 
C) Increase of $25,000 
D) Decrease of $25,000 
A) Increase of $2,500 
B) Decrease of $2,500 
C) Increase of $25,000 
D) Decrease of $25,000

Question 15

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 16

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

Question 17

Which of the following is NOT a theory of the term structure

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 18

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 19

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 20

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%

Exam 4: Interest Rates

A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zero-coupon bond.What is the duration of the portfolio?

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?

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

A repo rate is

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

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 of the fed funds rate

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

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.

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

Which of the following is true of LIBOR

Bootstrapping involves

The modified duration of a bond portfolio worth $1 million is 5 years.By approximately how much does the value of the portfolio change if all yields increase by 5 basis points?

The compounding frequency for an interest rate defines

Which of following describes forward rates?

Which of the following is NOT a theory of the term structure

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?

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.

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

OIS Discounting, Credit Issues, and Funding Costs

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Binomial Trees

Wiener Processes and Ito’s Lemma

The Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Volatility Smiles

Basic Numerical Procedures

Value at Risk

Estimating Volatilities and Correlations

Credit Risk

Credit Derivatives

Exotic Options

Filters