interest rate Flashcards
repo rates:
1-diff between ?
2- secured or unsecured
3- buy back at higher or lower price
4- min or max credit risk
5- short term and long term name ?
1- sale-repo p
2-secured
3-higher p
4-min
5-overnight repo / long term repo
basis point
0.01%
overnight rate
1- def
2- highest or lowest available
3-secured or unsecured
fed/ banks/lowest available / credit worthy institutions / unsecured
LIBOR (acronym)
London Interbank Offered Rate
which is higher repo rates or LIBOR ?
LIBOR
probability of a highly rated bank defaulting over a three-month period is ….. than over a five-year period ?
lower
relation between credit risk and int rate ?
increase increase
credit risk
the risk that there will be a default by the borrower of funds
LIBOR :
1- fixed or variable
variable rate
swap rate
exchange var rate (LIBOR) with fixed rate
interest rate
the amount of money a borrower
promises to pay the lender
LIBOR:
1- secured or unsecured
2- long term or short term
3- high or low credit risk
4- estimates made by banks or market
unsecured /short term / borrowing rate / low credit risk (AA rated banks) /banks
Treasury Rates
t-bills / t-bonds/ govt / own currency / risk free
OIS
a continually refreshed one-day rate.
OIS (acronym)
overnight indexed swaps
overnight rate
reserve req dep on A&L /
surplus funds - need additional funds
libror/ois spread increase then
fin stress / less confidence
nbr of compounding increase then
value at end of y increase
formula of continuous compounding
A e^Rn
continuous compounding can be thought of as being equivalent to
daily compounding
formula of Rc and Rm
bond yield
zero discount rate
par yield
coupon rate at par
zero rate .. bond yield
<
bootstrap method
used to determine zero rates.
bond yield can be solved using an iterative …
trial and error
spline func
not linear / exponential
R2 > R1,
then RF > R2
zero curve downward sloping
then RF < R2
Company Y will pay interest on the principal
between T1 and T2 at the fixed rate of RK and receive interest at RM
L (RM-RK)(T2-T1)
value of FRA at t=0
0/RK=RF
RK or RF change at t<>0
RF
a coupon-bearing
bond lasting n years has a duration of
less than n years
there is a … relationship between B and y
negative
duration D vs modified duration
continuous compounding/ frequency m
if the net duration is zero,
a financial institution eliminates its exposure to small
parallel shifts in the yield curve
large yield change
portf behave diff / more curvature
convexity is … when the payments are concentrated around one particular point in time.
least
the convexity of a bond portfolio tends to be
… when the portfolio provides payments evenly over a long period of time.
greatest
liquidity preference theory.
upward sloping / forward rates are greater
than expected future zero rates.
a portfolio where
maturities are mismatched can lead to ..
liquidity problems.
