Chapitre 6 - Manuel Flashcards
What cotation is used for Treasury bonds
Actual / actual
What quotation is used for US corporate and municipal bonds
30/360
What is used for US treasury bills and other money market instruments
Actual / 360
When can government bonds (treasury bonds) be delivered ?
When the governement bond has between 15 to 25 years to maturity on the first day of the delivery month
The conversion factor is set equal to ___
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
Bond maturity and times of coupon payments are rounded down to the nearest ___
Bond maturity and times of coupon payments are rounded down to the nearest 3 months
Bond yield > 6% : conversion factor system tends to favor the delivery of ___ coupon and ___ maturity bonds
Bond yield > 6% : conversion factor system tends to favor the delivery of low coupon and long maturity bonds
Bond yield < 6% : conversion factor system tends to favor the delivery of ___ coupon and ___ maturity bonds
Bond yield < 6% : conversion factor system tends to favor the delivery of high coupon and short maturity bonds
Yield curve upward sloping : bonds with a ___ time to maturity to be delivered
Yield curve upward sloping : bonds with a short time to maturity to be delivered
Yield curve downward sloping : bonds with a __ time to maturity to be delivered
Yield curve downward sloping : bonds with a long time to maturity to be delivered
Three-month eurodollar futures contract: definition
Futures contract on the interest that will be paid on 1 million $ for a future three-month perid
Three-month eurodollar futures contract: maturities
March, june, september and December for up to 10 years in the future
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
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
What happens when the eurodollar futures quote:
A) Increases by one basis point
B) Decreases by one basis point
A) Long position gains 25$ and short position loses 25$
B) Long positin loses 25$ and short positin gains 25$
What happens when :
A) Interests go up
B) Interests go odown
A) Bond and futures price decreases = long position loses and short wins
B) Bond and future sprice increases = long position wins and short lsoes
An investor who is long gains when interest rates ___ and who is hsrot gains when interest rates ___
An investor who is long gains when interest rates falls and who is hsrot gains when interest rates gains
Why is the eurodollar considered similar to the FRA ?
Locks in an interest rate for a future perid
Euroodollar vs futures contract (2 vs 2)
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 )
Duration : definition
Measures how long the holder of the bnd has t wait before receivng the present value of the cash payments
True or false: a coupon-beraing bond maturing in n years has a duratioon of n years ?
False : has a duratioon of less than n years because the holder receives some of the cash payments before year n
True or false: a zero-coupon bond maturing in n years has a duration of n years ?
True
What does the duratioon represent ?
Weighted average of the ______ with___ being equal to the ____ provided by the ____
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
Duratioon of a bond portfolio : definition
Weighted average of the duration fo the individual bonds in the portfolio with the weights being prooportion to othe bond price
When does the yields fo all boonds woould change by approximatively the same amount ?
When there is a parallel shift in the yield curve (bonds have differing maturities)
The duration relationship only applies to __
The duration relationship only applies to small changes in yield
How do financial insitutions attept to ohedge themselves against interest rate risk ?
- 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
Weakness of the duration hedging in portfolio
Doesn’t immunize a portfolio against nonparallel shifts in the zero curve
Shrot-term rates are more ___ and are not ___
Shrot-term rates are more volatile and are not perfectly correlated with long term rates
What contracts should be used for hedging exposure to :
A) Short-term interest rates ?
B) Long-term interest rates ?
A) Eurodollar futures
B) Ultra T-bond, Treasury bonds, treasury notes futures contract
What does duration tell you about the sensitivity of a bond portfolio to interest rates. What are the limitations of the duration measure?
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
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?
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)
