Equity and Fixed Income markets

Which of the following is true?

• Secured repo rates are lower than unsecured repo rates

• US Repo rates normally increase if Fed Reserve rates go down

• Unsecured repos have lower counterparty risks than secured repos

• Increasing rates negatively affect savers, positively affect borrowers

Answer explanation

Secured repo rates are lower than unsecured repo rates because they involve collateral, which reduces the lender's risk. In a secured repo transaction, the borrower provides collateral, such as government bonds, to the lender. This collateral reduces the lender's risk, leading to lower interest rates compared to unsecured repos, where no collateral is provided.

When the yield curve is upward sloping...

• Investors demand a premium for short-term maturities

• Investors think the Central Bank will stimulate the economy to fight a forthcoming recession

• Investors demand a compensation for longer maturities

• ...it is “inverted”; whereas a downward sloping curve is “normal”

• Indicates increasing yields for shorter maturities

Answer explanation

An upward-sloping yield curve indicates that investors demand a compensation for longer maturities. This is because they expect interest rates to rise in the future, making long-term investments riskier. As a result, they require higher yields for holding bonds with longer maturities, leading to an upward-sloping curve.

What is the SONIA rate?

• The rate established by the Bank of England

• The average overnight interbank rate

• The rate banks earn depositing money with the BoE

• The overnight indexed swap rate

Answer explanation

The SONIA rate, or Sterling Overnight Index Average, is the average overnight interbank rate. It is a widely used benchmark for short-term interest rates in the United Kingdom and reflects the cost of unsecured borrowing in the British pound sterling market. The other options refer to different rates or institutions and are not the correct definition of the SONIA rate.

What effect have last year's increases in the UK Central Bank benchmark rate had on SONIA rates?

• The SONIA rate has increased

• The SONIA rate has decreased

• The SONIA rate has not been affected

• It cannot be determined

Answer explanation

The question asks about the impact of the UK Central Bank's benchmark rate increase on SONIA rates. The correct answer is that the SONIA rate has increased. This implies that the SONIA rate, which is a reflection of actual overnight unsecured lending transactions in the UK market, has been influenced by the Central Bank's benchmark rate increase.

Which of the following statements is FALSE?

• US Commercial paper is generally riskier than T-bills because of higher liquidity and credit risk

• When the BoE increases the reference rate by 0.50%, the value of outstanding bonds increases

• Everything else being equal, lower-rated bonds have higher yields

• Investors demand higher yields for less liquid instruments

• Long-term bonds are generally more volatile than short-term securities

Answer explanation

The statement 'When the BoE increases the reference rate by 0.50%, the value of outstanding bonds increases' is false. When interest rates rise, the value of existing bonds falls. This is because new bonds issued will carry the higher interest rate, making existing bonds with lower rates less attractive, hence decreasing their market value.

The market is currently at £20 - £21.1

A trader submits a limit sell order at £21.2 which is pegged to the bid quote.

When the market changes to £19.5 – £20.1, the limit (pegged) order price is adjusted to:

• 19.9

• 20.3

• 20.4

• 20.7

• 21.0

A continuous auction starts with an empty order book.

The market opens and the following sequence of orders arrives:

10:00am Buy 2, limit 10

10:01am Buy 3, limit 11

10:20am Sell 2, limit 12

10:23am Sell 2, limit 9

10:50am Sell 3, limit 11

10:54am Buy 1, limit 11

What total volume would trade?

• 2

• 3

• 4

• 5

• 6

Answer explanation

In this continuous auction, the trades occur as follows: At 10:23am, the sell order with a limit of 9 matches the buy order with a limit of 10, trading 2 units. At 10:50am, the sell order with a limit of 11 matches the buy order with a limit of 11, trading 2 units. In total, 4 units are traded.

A continuous auction starts with an empty order book.

The market opens and the following sequence of orders arrives:

10:00am Buy 2, limit 10

10:01am Buy 3, limit 11

10:20am Sell 2, limit 12

10:23am Sell 2, limit 9

10:50am Sell 3, limit 11

10:54am Buy 1, limit 11

---> 10:55am Sell 2, market order.

At what average price would the market order be executed?

• 10

• 10.5

• 11

• 11.5

• 12

Answer explanation

The market order is a sell order for 2 units. The best available buy orders are 2 units at a limit of 10 and 3 units at a limit of 11. Since the market order is for 2 units, it will be executed at the best available price, which is 10.

Consider the following limit order book.

In a single price auction, at what price would the market clear? (Hint: find the equilibrium price)

• 520

• 521

• 522

• 523

• Some other price

Assume that the total public offering amount in a US Treasury Auction is $17 billion. The total amount bid by non-competitive bidders is $2 billion.

In addition, the following 8 competitive bids are received (see picture).

What is the stop-out rate at which the auction will be executed?

• 3.001%

• 2.998%

• 3.002%

• 3.000%

• 2.999%

Answer explanation

The stop-out rate is the highest rate at which the amount of a Treasury auction is sold. In this case, after considering the non-competitive bids, the remaining amount is allocated to the competitive bidders starting from the lowest rate. The rate at which the auction gets fully allocated is the stop-out rate. Here, it is 3.001%.