Midterm Part A

Question 1

Define amortizing bond

Answer 1

An amortizing bond has a payment schedule that calls for periodic payments of interest and repayments of principal

Question 2

What is the referece rate?

Answer 2

The reference rate could be an interest rate (e.g., U.S. Treasury bill rate), a stock index (e.g., the S&P 500), a foreign exchange rate, the price of crude oil, and the inflation rate etc

Question 3

What is Interest rate risk?

Answer 3

Interest rate risk is the risk that the price of a bond will decline when interest rate rises. This is a major risk faced by bond investors

Question 4

Define Treasury spot rates

Answer 4

Treasury spot rates are the interest rates on zero-coupon Treasury bonds