Chapitre 4 - Manuel Flashcards
Treausry rates : definition
- Rates an investor earns on Treasury bills and Treasury bonds
- Instruments used by a government to borrow in its own currency
Why are treasury rates are considered totally risk-free rates?
No chance that a government will default on an obligation in its own currency
LIBOR : definition
Unsecured short-term borrowing rate between banks
LIBOR : chracteristics
- Borrowing periods : 1 day to 1 year
- Published each business day by the BBA
- Banks submitting quotes have a AA credit rating
Banks are required to maintain a certain amount of cash with the central bank. (reserve). What does this reference to ?
Overnight rates
Repo rates : definition
Secured borrowing rates
Rep rates : how does it work ?
Financial insitutin that owns securities sells securities for a certain price and buys them back at a later time
2 types of repo
Overnight repo (day to day)
Term reps (longer arrangements)
Repo rate is superior or inferior the LIBOR ?
Inferior
Why do traders don’t use rates on Treasury bills an Treasury bonds as risk-free rates ?
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
LIBR-OIS: definition
Amount by which the three-month mmonth LIBOR exceeds three-month OIS rate
n-year coupoon interest rate : definition
Rate of interest earned on an investment that starts today and lasts fr n years
What does the price of the bond represent ?
Present value of all the cash flws that will be received by the owner of the bond
Bond yield : definition
Single discount rate that gives the bond’s value equal to its market price when applied to all cash flws
Par yield : definitioon
Coupon rate that causes the bond price to equal its par value (principal value)
Zero curve is ___ between the pooints determined using the bootstrap methdo
Zero curve is ___ prior to the first point and ___ beyond the last point
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
An OIS involves ____
An OIS involves exchanging a fixed rate for a floating rate
Floating rate is calculated assuming that __
Floating rate is calculated assuming that someone invests at the overnight rate and reinvest the proceeds each day
OIS with maturity < 12 months (3)
- 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
OIS with maturity > 12 months (2)
- Payments exchanged periodically (every 3 or 6 months)
- OIS rate can be treated as the rate on a par yield bond
Single exchange at maturity for the OIS with maturities up to ___
Single exchange at maturity for the OIS with maturities up to 12 months
Exchange take place every 3 months for the __ and __ OIS
Exchange take place every 3 months for the two-year and gfive-year OIS
Forward rate : definition
Rates of interest implied by current zero rates for period of time in the future
A) If the zero curve is upward sloppping between T1 and T2, 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 T2, so that R2 < R1 then RF < R2
The forward for a period of time enting at T2 is ___ than the T2 zero rate
If the zero curve is upward sloppping between T1 and T2, 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 T2, 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
Forward rate agreement : definition
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
When the contract is first entered into, the specified interest rate = ?
LIBOR rate at that time
What happens when :
A) LIBOR rate > agreed rate
B) LIBOR rate < agree rate
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
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 ____
A) Lender will receive interest on the principal between T1 and T2 at the fixed rate of Rk and pay interest at the LIBOR rate of RM
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 RM
What is FRA worth when RK = RF ?
0
As time passes, RK ____ and RF ___
As time passes, RK remains the same and RF is likely to change
