FRM Book 3 Chapter 16 Questions with Complete Solutions 100% Verified|
Latest Update Graded A+
What is the formula for the present value of an amount A received at time T when the
continuously compounded interest rate is R? Ae^(-RT)
How is the par yield on a bond defined? A bond's par yield is the coupon rate on the bond
that causes the bond's price to equal its par value.
How is a bond yield defined? A bond's yield is the discount rate that, when used for all of
the bond's cash flows, causes the total present value of the cash flows to equal the current
market price of the bond.
What is the difference between modified duration and dollar duration Modified duration
measures the relationship between proportional decreases (increases) in a bond's price and
increases (decreases) in its yield. Dollar duration measures the relationship between the actual
decreases (increases) in a bond's price and increases (decreases) in its yield
What is a forward rate agreement? Explain how it is usually settled A forward rate
agreement (FRA) is an agreement to exchange
(a) An amount obtained when a pre-determined fixed rate of interest is applied to a certain
principal for a cer-tain future period, and
(b) An amount obtained when the actual (floating) rate observed in the market is applied to the
same principal for the same period.
An FRA is normally settled at the beginning of the under-lying period. The settlement amount is
the difference between the two interest amounts discounted from the end of the period to the
beginning of the period at the floating rate.
Explain what the liquidity preference theory and the expectations theory imply about forward
interest rates and expected future spot rates Expectations theory assumes that forward
rates equal expected future spot rates. In liquidity preference theory, forward rates are greater
than expected future spot rates
Latest Update Graded A+
What is the formula for the present value of an amount A received at time T when the
continuously compounded interest rate is R? Ae^(-RT)
How is the par yield on a bond defined? A bond's par yield is the coupon rate on the bond
that causes the bond's price to equal its par value.
How is a bond yield defined? A bond's yield is the discount rate that, when used for all of
the bond's cash flows, causes the total present value of the cash flows to equal the current
market price of the bond.
What is the difference between modified duration and dollar duration Modified duration
measures the relationship between proportional decreases (increases) in a bond's price and
increases (decreases) in its yield. Dollar duration measures the relationship between the actual
decreases (increases) in a bond's price and increases (decreases) in its yield
What is a forward rate agreement? Explain how it is usually settled A forward rate
agreement (FRA) is an agreement to exchange
(a) An amount obtained when a pre-determined fixed rate of interest is applied to a certain
principal for a cer-tain future period, and
(b) An amount obtained when the actual (floating) rate observed in the market is applied to the
same principal for the same period.
An FRA is normally settled at the beginning of the under-lying period. The settlement amount is
the difference between the two interest amounts discounted from the end of the period to the
beginning of the period at the floating rate.
Explain what the liquidity preference theory and the expectations theory imply about forward
interest rates and expected future spot rates Expectations theory assumes that forward
rates equal expected future spot rates. In liquidity preference theory, forward rates are greater
than expected future spot rates
