Multiple choice questions on Treasury (Module C of Risk management)

1. Which of the following about a callable bond is true?

a. Callable bonds always trade at a discount to non-callable bonds.b. Callable bonds expose issuers to the risk of reduced re-

investment return.c. Callable bonds are actually variable tenor bonds.*d. Callable bonds are not as liquid as non-callable bonds.

2. What would be the price on 31.03.2009 of a 10 year zero coupon bond of face value Rs 10,000/- if the 10 year yield is 7.5%?a. 8452b. 4852*c. 2458d. 1548

Exp: PV = 10000/ (1.075) 10

3. Which of the following is not an exempted category for the purpose of CRR calculation?a) Credit Balances in ACU Dollar Accountsb) CBLOc) DTL in respect of OBUsd) Staff Security Deposits *

4. Which of the following can be included for DTL/ NDTL computation

a. Amount received from DICGC Claims b. Amount received from Insurance company on ad hoc settlement

of claimsc. Amount received from the court receiverd. Amount held as margin against LC*

5. A 91 days treasury bill maturing on 6-12-2007 was purchased on 12-10-2007 at a rate of Rs.99.1489 per Rs100. What is the yield on the investment?

Yield on investment = [(100- price) * 365] [price * No. of days to maturity]

= (100-99.1489)*365*100 ( 99.1489 *55 days) = 31065.15 = 5.70%

5453.18

6. You would like to import machinery from USA worth USD 100000 to be payable to the overseas supplier on 31st Oct[a] Spot Rate USD/INR = Rs. 48.8500/8600Forward Premium

September 0.2950/3000October 0.5400/5450November 0.7600/7650

[b]exchange margin 0.125%[c] Last two digits in multiples of nearest 25 paiseCalculate the rate to be quoted by the bank?

Ans: The premia for the forward rates are to be added to the spot rates in respect of currencies which are at a premium to arrive at the forward rates. Since this is an import transaction the offer rate of 48.8600 will be the starting point of the calculations. Since the due date of the bill is the exact date of 31.10 the entire premium for Oct is to be added and additionally the margin and then round off the obtained rate to the nearest upper 25 paise. Ans. is 49.4675

7. Which set of the following statements is true in respect of Commercial Paper (CP): 1, Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note 2. CP can be issued by Corporate, primary dealers (PDs) and the all-India financial institutions (FIs) 3. A corporate would be eligible to issue CP provided the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; 4.. The minimum credit rating shall be P-1 of CRISIL or such equivalent rating by other agencies. 5. CP can be issued for maturities between a minimum of 7 days and a maximum up to six months from the date of issue. 6. Amount invested by a single investor should not be less than Rs.15 lakh .a. 1,2 & 4b. 1,2 & 3* c. 1,4 & 5d. 1,4 & 6

8. A dealer has a $200 million open position. He finds that his VaR for a one day period with a one percent probability is $1000,000. This means that

a) The dealer can expect to lose max. $1000,000 in any given day about one percent of the time, or in other words, 2.5 times in a year (assuming 250 trading days).* b) the dealer can expect to lose max. $1000,000 in any given day about 99 percent of the time, or in other words, 247.5 times in a year (assuming 250 trading days).c) the dealer can expect to lose max. $2,000,000 in any given day about one percent of the time, or in other words, 2.5 times in a year (assuming 250 trading days). d) the dealer can expect to lose max. $ 4000,000 in any given day about one percent of the time, or in other words, 2.5 times in a year (assuming 250 trading days).

9. Coupon of a floating rate bond is modified a. whenever there is a change in the bench mark rate*.b. at pre-set intervals with reference to a bench mark rate.c. for changes in bench mark rate beyond agreed levels.

d. within a range, for changes in the bench mark rate.

10. Which of the following is true about a uniform price auction? a. An auction in which all successful bids are made for the same price.b. An auction in which all bidders have bid a uniform price.c. An auction in which all successful bidders are allotted bonds at the same price.*d. An auction in which the cut-off price is derived as the weighted average of all successful bids. 11. What is the price at which a treasury bill maturing on 23rd March 2008 would be valued on July 13, 2007 at a yield of 6.8204%?Answer: The price can be computed as = 100/[1+(yield * (No of days to maturity/365)]= 100/[1+(6.8204*(253/365)] = Rs. 95.4858

12. What is the day count convention in the treasury bill markets?a. 30/360b. Actual/Actualc. Actual/360d. Actual/365 *

13. Which of the following participants in the call markets are allowed to lend as well as borrow?a. Mutual Fundsb. Banks and Primary Dealers *c. Corporatesd. Financial Institutions

14. GOI security with coupon of 11.68%, maturing on 6-Aug-2008, is to be settled on 1-Feb-07. What are the number of days from the previous coupon date?a.       179b.       176c.       178d.       175 *

15. Frequency of coupon payments and duration of a bond area. Directly relatedb. Inversely related *c. Not related at all d. Randomly related

16. An interest rate swap is a. A series of fixed coupon paymentsb. A series of forward rate agreements*c. A series of forward interest ratesd. None of the above

17. The value of an option isa. The sum of its intrinsic and extrinsic value * b. its intrinsic value onlyc. Its time value onlyd. None of the above

18. If the short term interest rates are temporarily higher than the long term interest rates, the yield curve will bea. Sloping inward *b. Invertedc. Zigzagd. horizontal

19. Currently the yield on a government security is 5%. If the market price of the bond is Rs 160 what will be the coupon rate

a. 6 %b. 5%c. 8%*d. 10%

20. In a forward contract the actual cash flow occurs on the date of a. Transactionb. Deliveryc. Due *d. None of the above

21. In a forward contract the actual cash flow occurs on the date of a. Transactionb. Deliveryc. Due *d. None of the above

22. Investment objectives of a bank need not focus on which of the following

a. Reduction of time of investmentb. Maximisation of share holder valuec. Effective deployment of fundsd. None of the above*

23. If a dealer is bullish on USD, he shoulda. Sell EUR/USD call optionb. Buy EUR/USD put option*c. Buy EUR/USD call optiond. Keep mum

24. Collaterised borrowing and lending obligation is managed byA. RBIb. BSEc. Clearing corporation of India*d. this is a OTC product

25. The ceiling amount upto which a bank can borrow in the call money market is a. 25 % of Net worth*b. 50% of Net worthc. 75 % of Net worthd. 100 %of Net worth

26. When CP is issued on a stand alone basis, it runs the risk of a. non availability of funds at the time of retirement*b. definite availability of funds at the time of retirementc. there is no such relationshipd. insufficient information

27. CDs are bulk deposits issued by banks. the maximum period for which these can be issued is a. 3 years.b. 5 yearsc. one year*d. 10 years

28. As a measure of forex risk management banks have day light and overnight limits. Generallya. day light limits are less than overnight limitsb. day light limits are more than overnight limits*c. while day light limits are related to net worth overnight limits are linked to net profitsd. while day light limits are related to net profits overnight limits are linked to net worth

29. When you are expect the currency to appreciate you should a. buy a Call option in that currency*b. buy a Put option in that currencyc. Sell a Call option in that currencyd. Sell a Put option in that currency

30. RBI receives the following bids during a uniform price auction.Bank A-5.80% ; Bank B-6.25%; Bank C- 6.35%;Bank D-6.0%. The cut off yield is 6.10%. Which bank(s) will not get the allocation?a. Banks B and Cb. Bank Cc. Banks A and D *d. none of the above

Expl: Since this is uniform price auction all those who have quoted more than the cutoff rate will be allotted. Hence A and D banks will not get.

31. A customer want you to quote a forward sale contract for USD for 100,000/-delivery till Jan 2010. The current spot rates in the inter-bank market are USD/INR=48.3700/3800 and swap points are as under:Nov: 1900/2000,Dec:2700/3100; jan 3500/4000.What should be your rate with a 5 paise profit margin.a. 48.75b.49.00*c.48.25d.48.50EXpl: since this a option forward contract you should be prepared for delivery of the fx any time during the month. Since this is a sale contract we load the maximum. The rate therefore will be 48.3800 + .4000 + .0500= 48.83 say 49.00

32. Your forecast is that in 3 months time the 3 month GBP interest rate will go down while that of USD will raise. However, you are not

sure as to the movement of GBP/USD rate. What should be your action in the situation?a. Sell GBP 6 months forwardb. Buy GBP 6 months forwardc. Buy GBP 3 month forward and sell 6 months forward.d. Sell GBP 3 months forward and buy 6 month forward.*

Expl: We would like to borrow the currency in the spot markets in which interest rate are likely to appreciate and sell the other way. Hence we should borrow USD for 3 months after 3 months i.e. 3rd to 6 months. For the same period we should lend GBP. This is same thing as selling GBP 3 months forward and buy 6 months forward.

33. What will be the annualized yield of the treasury bill of face value Rs. 1 lac with maturity after 85 days which is being traded at Rs. 98000/. a. 8.59%b. 8.76%*c. 8.02%d. 8.19%

Expl: In treasury bills the day count is 365 days and the yield Y = (face value – price)/price * 365/85 = 8.76%

34.A bank and its customer have the following relative advantages in borrowing.

Bank customerFixed USD 4% 5.5%Floating LIBOR + 25bps LIBOR + 100 bpsThe firm and bank can achieve the total gain by doing a plain vanilla interest swap ofa. 1.5%b. 2.5%c. 1.0%d. 0.5%*

Expl. In a swap parties would choose the rate with relative advantage and not absolute advantage. Bank has higher advantage of 1.5 % fixed rate basis and hence the borrower borrows at floating rate. The net gain for both is 0.5%