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Information Report

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Hull: Options, Futures and Other Derivatives, Ninth Edition
Chapter 4: Interest Rates
Multiple Choice Test Bank: Questions
1. 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
2. An interest rate is 6% per annum with annual compounding. What is the
equivalent rate with continuous compounding?
A. 5.

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Hull: Options, Futures and Other Derivatives, Ninth EditionChapter 4: Interest RatesMultiple Choice Test Ban: !uestions
1.The compounding frequency for an interest rate denesA.The frequency with which interest is paidB.A unit of measurement for the interest rateC.The relationship between the annual interest rate and the monthly interest rate D.None of the aboe!.An interest rate is # per annum with annual compounding. $hat is the equialent rate with continuous compounding%A.&.'(#B. .!1#C.&.)*# D. .1)#*.An interest rate is &# per annum with continuous compounding. $hat is the equialent rate with semiannual compounding%A.&.+ #B.&.+*#C.,.('# D.,.(,#,.An interest rate is 1!# per annum with semiannual compounding. $hat is the equialent rate with quarterly compounding%A.11.)*#B.11. #C.11.''# D.11.(!#&.The two-year ero rate is # and the three year ero rate is .&#. $hat is theforward rate for the third year% All rates are continuously compounded.A. .'&#B.'.+#C.'.!&# D.'.&# .The si/-month ero rate is )# per annum with semiannual compounding. Theprice of a one-year bond that proides a coupon of # per annum semiannually is ('. $hat is the one-year continuously compounded ero rate%A.).+!#B.).&!#
C.(.+!#D.(.&!#'.The yield cure is 0at at # per annum. $hat is the alue of an 2A where the holder receies interest at the rate of )# per annum for a si/-month period on a principal of 314+++ starting in two years% All rates are compounded semiannually.A.3(.1!B.3(.+!C.3).))D.3). *).5nder liquidity preference theory4 which of the following is always true% A.The forward rate is higher than the spot rate when both hae the samematurity.B.orward rates are unbiased predictors of e/pected future spot rates. C.The spot rate for a certain maturity is higher than the par yield for that maturity.D.orward rates are higher than e/pected future spot rates. (.The ero cure is upward sloping. Dene 6 as the 1-year par yield4 7 as the 1-year ero rate and 8 as the forward rate for the period between 1 and 1.& year. $hich of the following is true% A.6 is less than 7 which is less than 8B.7 is less than 6 which is less than 8C.6 is less than 8 which is less than 7 D.8 is less than 7 which is less than 61+.$hich of the following is true of the fed funds rateA.9t is the same as the Treasury rateB.9t is an oernight interban: rateC.9t is a rate for which collateral is postedD.9t is a type of repo rate11.The modied duration of a bond portfolio worth 31 million is & years. By appro/imately how much does the alue of the portfolio change if all yields increase by & basis points%A.9ncrease of 3!4&++B.Decrease of 3!4&++C.9ncrease of 3!&4+++D.Decrease of 3!&4+++1!.A company inests 314+++ in a e-year ero-coupon bond and 3,4+++ in a ten-year ero-coupon bond. $hat is the duration of the portfolio% A. years
B. ' yearsC. ) yearsD. ( years1*.$hich of the following is true of ;9B<2A.The ;9B<2 rate is free of credit ris:B.A ;9B<2 rate is lower than the Treasury rate when the two hae the same maturity C.9t is a rate used when borrowing and lending ta:es place between ban:sD.9t is sub=ect to faorable ta/ treatment in the 5.>.1,.$hich of following describes forward rates%A.9nterest rates implied by current ero rates for future periods of timeB.9nterest rate earned on an inestment that starts today and last for n-years in the future without couponsC.The coupon rate that causes a bond price to equal its par ?or principal@alueD.A single discount rate that gies the alue of a bond equal to itsmar:et price when applied to all cash 0ows1&.$hich of the following is N<T a theory of the term structureA./pectations theoryB.ar:et segmentation theoryC.;iquidity preference theoryD.aturity preference theory 1 .A repo rate isA.An uncollateralied rateB.A rate where the credit ris: is relatie highC.The rate implicit in a transaction where securities are sold and bought bac: later at a higher priceD.None of the aboe1'.Bootstrapping inolesA.Calculating the yield on a bondB.$or:ing from short maturity instruments to longer maturity instruments determining ero rates at each stepC.$or:ing from long maturity instruments to shorter maturity instruments determining ero rates at each stepD.The calculation of par yields
1).The ero cure is downward sloping. Dene 6 as the 1-year par yield4 7 as the1-year ero rate and 8 as the forward rate for the period between 1 and 1.& year. $hich of the following is true% A.6 is less than 7 which is less than 8B.7 is less than 6 which is less than 8C.6 is less than 8 which is less than 7 D.8 is less than 7 which is less than 61(.$hich of the following is true%A.$hen interest rates in the economy increase4 all bond prices increaseB.As its coupon increases4 a bonds price decreasesC.;onger maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the sameD.None of the aboe!+. The si/ month and one-year rates are *# and ,# per annum with semiannual compounding. $hich of the following is closest to the one-year par yield e/pressed with semiannual compounding% A.*.((#B.*.()#C.*.('#D.*.( #

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