1 ÙThe Time Value of Money!ÀJ K1.A bank must satisfy certain creditworthiness criteria in order to be able to accepta LIBOR quote from another bank and receive deposits from that bank at LIBOR.Typically it must have to have a£¤credit rating.A.AAAB.AAC.AaaD.Aa2.Derivatives traders regard£¤rates as a better indication of the”true”risk-free ratethan Treasury rates.A.LIBORB.NIBORC.HIBORD.SIBOR3.The most common type of repo is an£¤,in which the agreement is renegotiatedeach day.A.everyday repoB.overnight repoC.data repoD.term repo4.The n-year zero-coupon interest rate is sometimes also referred to as the n-year£¤,the n-year£¤,or just the n-year£¤.A.zero rateB.par rateC.spot rateD.zero5.The£¤for a certain bond maturity is the coupon rate that causes the bond priceto equal its par value£The par value is the same as the principal value¤.A.bond yieldB.spot rateC.par yieldD.forward rate6.A largefinancial institution can at no cost lock in the forward rate for a future timeperiod,so the value of the FRA where the forward rate is earned is£¤.A.positiveB.negativeC.zeroD.unknown121 ÙTHE TIME VALUE OF MONEY7.A zero-coupon bond that lasts n years has a duration of n years.However,a coupon-bearing bond lasting n years has a duration of£¤n years,because the holder receives some of the£¤payments prior to year n.A.more thanB.less thanC.interestD.principal8.There is a£¤relationship between bond prices and bond yields.When bond yieldsincrease,bond prices£¤.When bond yields decrease,bond prices£¤.A.positiveB.negativeC.increaseD.decrease9.Theories of the term structure of interest rates mainly include£¤A.expectations theoryB.risk value theoryC.liquidity preference theoryD.market segmentation theory!§äK(3 ( K )ÒS y”√”§ Ø K )ÒS y”×”)1.The higher the credit risk§the higher the interest rate that is promised by theborrower.()2.Treasury rates are regarded as risk-free rates©()3.Derivatives traders do not usually use Treasury rates as risk-free rates,instead theyuse LIBID rates.()4.The limit as the compounding frequency,m,tends to infinity is known as continuouscompounding.For most practical purposes,con tinuous compounding can be thought of as being equivalent to monthly compounding.()5.A largefinancial institution can at no cost lock in the forward rate for a future timeperiod,so the value of the FRA where the forward rate is earned is zero.()6.A zero-coupon bond that lasts n years has a duration of n years.However,a coupon-bearing bond lasting n years has a duration of less than n years,becaus e the holder receives some of the principal payments prior to year n.()7.The bond price is thefinal value of all payments.The duration is therefore a weightedaverage of the times when payments are made,with the weight applied to time t i being equal to the proportion of the bond’s totalfinal value provided by the cash flow at time t i.()38.There is a negative relationship between bond prices and bond yields.When bondyields increase,bond prices decrease.When bond yields decrease,bond prices in-crease.()9.When duration is used for bond portfolios,there is an implicit assumption that theyields of all bonds will change by the same amount.()10.The convexity of a bond portfolio tends to be greatest when the portfolio providespayments evenly over a long period of time.It is least when the payments are concentrated around one particular point in time.()11.By matching convexity as well as duration,a company can make itself immune torelatively large nonparallel shifts in the zero curve.However,it is still exposed to nonparallel/parallel shifts.()n!¶c)º1.LIBOR2.LIBID3.A Repo or Repurchase Agreement4.Repo Rate5.Zero Rates6.Bond Yield7.Forward Interest Rate8.Forward Rate Agreement(FRA)9.Duration10.The Duration of a Bond Portfolioo!O K1.A bank quotes you an interest rate of l4%Per annum with quarterly compound-ing©What is the equivalent rate with(a)continuous compounding and(b)annual compounding?41 ÙTHE TIME VALUE OF MONEY2.What rate of interest with continuous compounding is equivalent to15%per annumwith month1y compounding?3.A deposit account pays l2%per annum with continuous compounding§but interestis actually paid quarterly©How much interest will be paid each quarter on a$10000 deposit?4.Suppose that zero interest rates with continuous compounding are as follows.Calculateforward interest rates for the second,third,fourth,andfifth years.Maturity£years¤Rate£%per annum¤18.027.537.247.05 6.95.Suppose that6-month§12-month§18-month§24-month§and30-month zero ratesare4%§4.2%§4.4%§4.6%§and4.8%per annum with continuous compounding respectively.Estimate the cash price of a bond with a face value of l00that will mature in30months pays a coupon of4%perineum semiannually©6.Suppose that the6-month§12-month§18-month§and24-month zero rates are5%§6%,6.5%,and7%§respectively©What is the two-year par yield?7.Afive-year bond with a yield of11%(continuously compounded)pays an8%couponat the end of each year.a.What is the bond’s price?b.What is the bond’s duration?Ê!ØãK1.Theories of the term structure of interest rates.。