Chapitre 6 - Manuel

Question 1

What cotation is used for Treasury bonds

Answer 1

Actual / actual

Question 2

What quotation is used for US corporate and municipal bonds

Answer 2

30/360

Question 3

What is used for US treasury bills and other money market instruments

Answer 3

Actual / 360

Question 4

When can government bonds (treasury bonds) be delivered ?

Answer 4

When the governement bond has between 15 to 25 years to maturity on the first day of the delivery month

Question 5

The conversion factor is set equal to ___

Answer 5

The conversion factor is set equal to the quoted price the bond would have per dollar of principal on the first day of the delivery month on the assumption that interest rate for all maturities equals 6% per annum

Question 6

Bond maturity and times of coupon payments are rounded down to the nearest ___

Answer 6

Bond maturity and times of coupon payments are rounded down to the nearest 3 months

Question 7

Bond yield > 6% : conversion factor system tends to favor the delivery of ___ coupon and ___ maturity bonds

Answer 7

Bond yield > 6% : conversion factor system tends to favor the delivery of low coupon and long maturity bonds

Question 8

Bond yield < 6% : conversion factor system tends to favor the delivery of ___ coupon and ___ maturity bonds

Answer 8

Bond yield < 6% : conversion factor system tends to favor the delivery of high coupon and short maturity bonds

Question 9

Yield curve upward sloping : bonds with a ___ time to maturity to be delivered

Answer 9

Yield curve upward sloping : bonds with a short time to maturity to be delivered

Question 10

Yield curve downward sloping : bonds with a __ time to maturity to be delivered

Answer 10

Yield curve downward sloping : bonds with a long time to maturity to be delivered

Question 11

Three-month eurodollar futures contract: definition

Answer 11

Futures contract on the interest that will be paid on 1 million $ for a future three-month perid

Question 12

Three-month eurodollar futures contract: maturities

Answer 12

March, june, september and December for up to 10 years in the future

Question 13

The eurodollar futures contract is designed so that one-basis point (0.01%) move in the futures qute lead to a gain/loss of __ per contract

Answer 13

The eurodollar futures contract is designed so that one-basis point (0.01%) move in the futures qute lead to a gain/loss of 25$ per contract

Question 14

What happens when the eurodollar futures quote:

A) Increases by one basis point

B) Decreases by one basis point

Answer 14

A) Long position gains 25$ and short position loses 25$

B) Long positin loses 25$ and short positin gains 25$

Question 15

What happens when :

A) Interests go up

B) Interests go odown

Answer 15

A) Bond and futures price decreases = long position loses and short wins

B) Bond and future sprice increases = long position wins and short lsoes

Question 16

An investor who is long gains when interest rates ___ and who is hsrot gains when interest rates ___

Answer 16

An investor who is long gains when interest rates falls and who is hsrot gains when interest rates gains

Question 17

Why is the eurodollar considered similar to the FRA ?

Answer 17

Locks in an interest rate for a future perid

Question 18

Euroodollar vs futures contract (2 vs 2)

Answer 18

Eurodollar futures contract

• Settled daily
• The final settlement is at T₁ (reflects the realized interest rate for the period T₁ to T₂ )

Forward rate agreement

• Not settled daily

The final settlement is at T₂ (reflects the realized interest rate for the period T₁ to T₂ )

Question 19

Duration : definition

Answer 19

Measures how long the holder of the bnd has t wait before receivng the present value of the cash payments

Question 20

True or false: a coupon-beraing bond maturing in n years has a duratioon of n years ?

Answer 20

False : has a duratioon of less than n years because the holder receives some of the cash payments before year n

Question 21

True or false: a zero-coupon bond maturing in n years has a duration of n years ?

Answer 21

True

Question 22

What does the duratioon represent ?

Weighted average of the ______ with___ being equal to the ____ provided by the ____

Answer 22

Weighted average of the times when payments are made with the weight applied to time tibeing equal to the proportion of the bond’s total present value provided by the cash flow at ti

Question 23

Duratioon of a bond portfolio : definition

Answer 23

Weighted average of the duration fo the individual bonds in the portfolio with the weights being prooportion to othe bond price

Question 24

When does the yields fo all boonds woould change by approximatively the same amount ?

Answer 24

When there is a parallel shift in the yield curve (bonds have differing maturities)

Question 25

The duration relationship only applies to __

Answer 25

The duration relationship only applies to small changes in yield

Question 26

How do financial insitutions attept to ohedge themselves against interest rate risk ?

Answer 26

• By ensuring that the average duration fo their assets equals the average duratioon of their liabilities (short position in bonds) (duration matching, portfolio immunization)
• Ensures that a small parallel shift in the interst rates will have a little effect on the value of the protfolio
• Gain / loss on the assets should offset the loss/gain on the libabilities

Question 27

Weakness of the duration hedging in portfolio

Answer 27

Doesn’t immunize a portfolio against nonparallel shifts in the zero curve

Question 28

Shrot-term rates are more ___ and are not ___

Answer 28

Shrot-term rates are more volatile and are not perfectly correlated with long term rates

Question 29

What contracts should be used for hedging exposure to :

A) Short-term interest rates ?

B) Long-term interest rates ?

Answer 29

A) Eurodollar futures

B) Ultra T-bond, Treasury bonds, treasury notes futures contract

Question 30

What does duration tell you about the sensitivity of a bond portfolio to interest rates. What are the limitations of the duration measure?

Answer 30

Duration provides information about the effect of a small parallel shift in the yield curve oon the value fo a bond prtfolio

Limitatioon : only applies to small parallel shifts in the yield curve

Question 31

An investor is looking for arbitrage opportunities in the Treasury bond futures market. What complications are created by the fact that the party with a short position can choose to deliver any bond with a maturity between 15 and 25 years?

Answer 31

Uncertainty of whcih boond will be delivered introduces complications:

• The bond that appears cheapest-to-deliver may not be cheapest to deliver at maturity
• Not a problem if futures price too low (short position decides)
• Problem if futures price too high (doesn’t know which bond will be shorted)