Week 2 Interest Rates

Question 1

What are some factors you should consider when applying for a mortgage?

Answer 1

• Offset account
• Interest only
• Interest rate
• Expectation of what future rates will be  future income
• Lock in rates

Question 2

Difference between Hedging & Immunisation?

Answer 2

Immunisation ensure that the rate is locked in which means the upside potiential is also forfeit.

Hedging utilising financial intruments to offset risk, may or may not recieve upside.

Question 3

What are examples of hedging ?

Answer 3

1) Currency Swaps
2) Commodity Swaps or Futures
3) Fuel Swaps or Options

Question 4

What are examples of immunisation?

Answer 4

1) Cash Flow Matching
2) Duration Matching

Question 5

Why is Price & Reinvestment RIsk opposites of each other?

Answer 5

Price risk is the risk of interest rates going up and reducing the initial bond/loan.

Reinvestment risk is the risk of interest rates going down and reducing the amount of gained from reinvesting.