Week 3

Question 1

Interest rate risk

Answer 1

Risk of adverse change in cash flows or value as a result of a change in interest rate

Question 2

Liquidiation theory

Answer 2

-People rather have cash
-investors must be compensated for tying up money for long time

Question 3

Market segmentation theory

Answer 3

Medium & long term rates are determined independently

Question 4

(Pure) expectations theory

Answer 4

If investors feels interest rates will rise(fall) in future, yield curve will be upward(downward)

Question 5

LIBOR

Answer 5

Unsecured short term rate, global banks lend to each other for short term loans

Question 6

Overnight indexed swap (OIS)

Answer 6

A swap where a fixed interest rate for a period is exchanged for an average of overnight interbank rates

Question 7

Par rates

Answer 7

Bond yield where bond price= face value and coupon = yield

Question 8

Zero rates

Answer 8

The return that would be earned on a bond that provides zero coupons

Question 9

Forward rates

Answer 9

The interest rate for a period of time starting in the future

Question 10

Maculay Duration

Answer 10

The time- weighted average of the PV of future CF

Question 11

Convexity

Answer 11

-measures curvature of price
-improves accuracy of the impact of interest rate movements when combined with duration

Question 12

MD

Answer 12

Gives approximate result when calculating Expected Loss of 1% change in interest