Interest Rates C4

1. The compounding frequency for an interest rate defines

• The frequency with which interest is paid

• A unit of measurement for the interest rate

• The relationship between the annual interest rate and the monthly interest rate

• None of the above

2. An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding?

• 5.79%

• 6.21%

• 5.83%

• 6.18%

3. 3.An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding?

• 5.06%

• 5.03%

• 4.97%

• 4.94%

4. An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding?

• 11.83%

• 11.66%

• 11.77%

• 11.92%

5. The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded.

• 6.75%

• 7.0%

• 7.25%

• 7.5%

6. The six-month zero rate is 8% per annum with semiannual compounding. The price of a one-year bond that provides a coupon of 6% per annum semiannually is 97. What is the one-year continuously compounded zero rate?

• 8.02%

• 8.52%

• 9.02%

• 9.52%

7. The yield curve is flat at 6% per annum. What is the value of an FRA where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1,000 starting in two years? All rates are compounded semiannually.

• $9.12

• $9.02

• $8.88

• $8.63

8. Under liquidity preference theory, which of the following is always true?

• The forward rate is higher than the spot rate when both have the same maturity.

• Forward rates are unbiased predictors of expected future spot rates.

• The spot rate for a certain maturity is higher than the par yield for that maturity.

• Forward rates are higher than expected future spot rates.

9. The zero curve is upward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the following is true?

• X is less than Y which is less than Z

• Y is less than X which is less than Z

• X is less than Z which is less than Y

• Z is less than Y which is less than X

10. Which of the following is true of the fed funds rate

• It is the same as the Treasury rate

• It is an overnight interbank rate

• It is a rate for which collateral is posted

• It is a type of repo rate