Chapitre 4 - Manuel

Question 1

Treausry rates : definition

Answer 1

• Rates an investor earns on Treasury bills and Treasury bonds
• Instruments used by a government to borrow in its own currency

Question 2

Why are treasury rates are considered totally risk-free rates?

Answer 2

No chance that a government will default on an obligation in its own currency

Question 3

LIBOR : definition

Answer 3

Unsecured short-term borrowing rate between banks

Question 4

LIBOR : chracteristics

Answer 4

• Borrowing periods : 1 day to 1 year
• Published each business day by the BBA
• Banks submitting quotes have a AA credit rating

Question 5

Banks are required to maintain a certain amount of cash with the central bank. (reserve). What does this reference to ?

Answer 5

Overnight rates

Question 6

Repo rates : definition

Answer 6

Secured borrowing rates

Question 7

Rep rates : how does it work ?

Answer 7

Financial insitutin that owns securities sells securities for a certain price and buys them back at a later time

Question 8

2 types of repo

Answer 8

Overnight repo (day to day)

Term reps (longer arrangements)

Question 9

Repo rate is superior or inferior the LIBOR ?

Answer 9

Inferior

Question 10

Why do traders don’t use rates on Treasury bills an Treasury bonds as risk-free rates ?

Answer 10

Tax and regulatrty factors that lead to Treasury rates being artifically low

• Banks are not required to keep capital for investments in a Treasury instruments but they are required to keep capital for toher low risk investments
• In the USA, treasury instruments are given favorable tax treatment

Question 11

LIBR-OIS: definition

Answer 11

Amount by which the three-month mmonth LIBOR exceeds three-month OIS rate

Question 12

n-year coupoon interest rate : definition

Answer 12

Rate of interest earned on an investment that starts today and lasts fr n years

Question 13

What does the price of the bond represent ?

Answer 13

Present value of all the cash flws that will be received by the owner of the bond

Question 14

Bond yield : definition

Answer 14

Single discount rate that gives the bond’s value equal to its market price when applied to all cash flws

Question 15

Par yield : definitioon

Answer 15

Coupon rate that causes the bond price to equal its par value (principal value)

Question 16

Zero curve is ___ between the pooints determined using the bootstrap methdo

Zero curve is ___ prior to the first point and ___ beyond the last point

Answer 16

Zero curve is linear between the pooints determined using the bootstrap methdo

Zero curve is horizontal prior to the first point and horizntal beyond the last point

Question 17

An OIS involves ____

Answer 17

An OIS involves exchanging a fixed rate for a floating rate

Question 18

Floating rate is calculated assuming that __

Answer 18

Floating rate is calculated assuming that someone invests at the overnight rate and reinvest the proceeds each day

Question 19

OIS with maturity < 12 months (3)

Answer 19

• Fixed rate exchanged for the floating rate juste once
• OIS fixed rate exchanged for floating rate is already a zero rate
• Can be treated like the 3-month, 6-month, 12-month Treasury rates

Question 20

OIS with maturity > 12 months (2)

Answer 20

• Payments exchanged periodically (every 3 or 6 months)
• OIS rate can be treated as the rate on a par yield bond

Question 21

Single exchange at maturity for the OIS with maturities up to ___

Answer 21

Single exchange at maturity for the OIS with maturities up to 12 months

Question 22

Exchange take place every 3 months for the __ and __ OIS

Answer 22

Exchange take place every 3 months for the two-year and gfive-year OIS

Question 23

Forward rate : definition

Answer 23

Rates of interest implied by current zero rates for period of time in the future

Question 24

A) If the zero curve is upward sloppping between T₁ and T_2, so that R₂ > R₁ then RF > R2

The forward rate for a period of time enting at T₂ is _{___} than the T₂ zero rate

B) If the zero curve is downward sloppping between T₁ and T_2, so that R₂ < R₁ then RF < R2

The forward for a period of time enting at T₂ is ___ than the T₂ zero rate

Answer 24

If the zero curve is upward sloppping between T₁ and T_2, so that R₂ > R₁ then RF > R2

The forward rate for a period of time enting at T₂ greater than the T₂ zero rate

B) If the zero curve is downward sloppping between T₁ and T_2, so that R₂ < R₁ then RF < R2

The forward rate for a period of time enting at T₂ is less than the T₂ zero rate

Question 25

Forward rate agreement : definition

Answer 25

Over-the-counter contract designed to fix the interest rate that will apply to borrowing/lending a certain principal amunt during a specified interest rate

Question 26

When the contract is first entered into, the specified interest rate = ?

Answer 26

LIBOR rate at that time

Question 27

What happens when :

A) LIBOR rate > agreed rate

B) LIBOR rate < agree rate

Answer 27

A) borrower pays the lender the difference between the two applied to othe principal

B) lender pays the borrower the difference between the twoo applied to the pricipal

Question 28

FRA : Agreement where

A) Lender will _ interest on the principal between T₁ and T₂ at the ___ and __ interst at the ____

B) Borrower will _ interest on the principal between T₁ and T₂ at the ___ and __ interst at the ____

Answer 28

A) Lender will receive interest on the principal between T₁ and T₂ at the fixed rate of R_k and pay interest at the LIBOR rate of R_M

B) Borrower will pay interest on the principal between T₁ and T₂ at the fixed rate of RK and receive interest at the LIBOR rate of R_M

Question 29

What is FRA worth when R_K = RF ?

Answer 29

0

Question 30

As time passes, RK ____ and RF ___

Answer 30

As time passes, RK remains the same and RF is likely to change