Test Bank: Chapter 6 Interest Rate Futures

1. Which of following is applicable to corporate bonds in the United States (circle one) (a) Actual/360 (b) Actual/Actual (c) 30/360 (d) Actual/365

2. It is May 1. The quoted price of a bond with an Actual/365 day count and 12% per annum coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What, to two decimal place accuracy, is the cash price? _ _ _ _ _ _

3. What difference would it make to your answer to question 3 if the bond’s day count were 30/360? _ _ _ _ _ _

4. The quoted futures price is 103.5. Which of the following four bonds is cheapest to deliver (circle one) (a) Quoted price = 110; conversion factor = 1.0400. (b) Quoted price = 160; conversion factor = 1.5200. (c) Quoted price =131; conversion factor = 1.2500. (d) Quoted price = 143; conversion factor = 1.3500.

5. Which of the following is not an option open to the party with a short position in the Treasury bond futures contract (circle one) (a) The ability to deliver any of a number of different bonds (b) The wild card play (c) The fact that delivery can be made any time during the delivery month (d) The interest rate used in the calculation of the conversion factor

6. A trader enters into a long position in one Eurodollar futures contract. How much does the trader gain when the futures price quote increases by 6 basis points?_ _ _ _ _ _

7. A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zero-coupon bond. What is the duration of the portfolio? _ _ _ _ _ _

8. The modified duration of a bond portfolio worth $1 million is 5 years. By approximately how much does the value of the portfolio change if all yields increase by 5 basis points? Indicate whether the dollar amount you calculate is an increase or a decrease _ _ _ _ _ _ _ _ _ _ _ _ _

9. A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 5.5 years. How many contracts are necessary for hedging the portfolio? _ _ _ _ _ _ _

10. Which of the following is true (circle one) (a) The futures rates calculated from a Eurodollar futures quote is always less than

the corresponding forward rate (b) The futures rates calculated from a Eurodollar futures quote is always greater

than the corresponding forward rate (c) The futures rates calculated from a Eurodollar futures quote should equal the

corresponding forward rate (d) The futures rates calculated from a Eurodollar futures quote is sometimes

greater than and sometimes less than the corresponding forward rate