Question 1

Determine the price of a 3 year bond paying a 5% coupon. The 1,2 and 3 year spot rates are 5%, 6% and 7% respectively. Assume a face value of $100.

Options :

A : $ 94.92

B : $ 106.00

C : $ 100.00

D : $93.92

Answer: A

Question 2

The price of an interest rate cap is determined by:

I. The period to which the cap relates

II. Volatility of the underlying interest rate

III. The exercise or the strike rate

IV. The risk free rate

Options :

A :

I, II, III and IV

B : I, II and III

C : II, III and IV

D : I, II and IV

Answer: B

Question 3

Identify the underlying asset in a treasury note futures contract?

Options :

A : Any long term US Treasury bond with a maturity of more than 10 years and not callable within 10 years

B :

Any long term US Treasury note with a maturity between 6.5 years and 10 years from the date of delivery

C : Any long term US Treasury bond with a maturity of more than 15 years and not callable within 15 years

D : Any of the above, with the price adjusted with the coupon and maturity date of the bond delivered

Answer: B

Question 4

Which of the following will have the effect of increasing the duration of a bond, all else remaining equal:

I. Increase in bond coupon

II. Increase in bond yield

III. Decrease in coupon frequency

IV. Increase in bond maturity

Options :

A : III and IV

B : I and III

C : I and II

D : II, III and IV

Answer: A

Question 5

Backwardation can be explained by:

Options :

A : expectations of oversupply in the future

B : convenience yields being greater than the total carrying cost

C : short term shortages in the spot markets

D : all of the above

Answer: D