Test Information Description

Test Information Description

7/1/18, 8’29 PMTake Test: Quiz 5 – UML Fixed Income Securities – Sec …

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UML Fixed Income Securities – Sec 061 SU18 SLatif

Home Page Week 6: June 25 – July 01 Take Test: Quiz 5H

Take Test: Quiz 5

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Instructions Timed Test This test has a time limit of 2 hours.This test will save and submit automatically when the time expires.

Warnings appear when half the time, 5 minutes, 1 minute, and 30 seconds remain. Multiple Attempts Not allowed. This test can only be taken once. Force Completion This test can be saved and resumed at any point until time has expired. The timer will continue to run if you leave the test.

This quiz covers chapter 5 from section 5.3 (page 167) to the end of the chapter (page 183).

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The forward contract includes the underlying ​​​​security ​in the trade, whereas FRA is ​​​​​​​​​about trading the annual interest rate and not about how much money is being borrowed.

QUESTION 1

What is the difference between a Forward Contract and an FRA?

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QUESTION 2

What is the difference between an FRA and a Swap?

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Vatsal Patel

Biren Patel

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FRA = pay fixed for one period Swaps = pay fixed over multiple periods As such: Swap = multiple FRAs

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the forward contract doesn’t have value at the initiation because there is no premium for it as opposed to options contract. Once the price is set for a specific commodity, the value of a forward contract will go up and down according to the commodities price.

QUESTION 3

Why doesn’t the value of a forward contrat stay at zero throughout its life even though it starts out at zero at initiation?

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That is because the ​​​ spot curve rates decide the forward curve rates and if the spot rate were rising the forward rate would rise too. Forward rate rising at a current period would plot it higher than the spot curve.

QUESTION 4

If you fix the loan length (one year maybe) and then calculate all forward rates using that time interval, that is f(0,1,2), f(0, 2, 3), f(0, 3, 4) and so on and plot the resulting forward yield curve against the spot curve, why is the forward curve always higher than the spot curve when the spot yield curve is upwardly sloping?

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There will be multiple forward curves because supply and demand will be different for different maturity ​​​​​​​​​​​​​​​​​​​yield. Forward price will change accordingly and it will give us multiple forward curves.

QUESTION 5

For Treasuries, there is only one spot yield curve that tells you rates for all possible maturities of Treasury loans starting today. How many Forward curves can you have today? One or more? Why?

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8.75 0.6938 9 0.6852

9.25 0.6767 9.5 0.6683

9.75 0.6599 10 0.6516

91.861

QUESTION 6

t Z(0,t) 0.25 0.9891 0.5 0.9798

0.75 0.9713 1 0.9633

1.25 0.9553 1.5 0.9473

1.75 0.9392 2 0.931

2.25 0.9227 2.5 0.9143

2.75 0.9059 3 0.8973

3.25 0.8888 3.5 0.8801

3.75 0.8714 4 0.8627

4.25 0.8538 4.5 0.845

4.75 0.8361 5 0.8272

5.25 0.8182 5.5 0.8093

5.75 0.8003 6 0.7913

6.25 0.7823 6.5 0.7733

6.75 0.7643 7 0.7554

7.25 0.7465 7.5 0.7376

7.75 0.7287 8 0.7199

8.25 0.7111 8.5 0.7024

8.75 0.6938 9 0.6852

9.25 0.6767 9.5 0.6683

9.75 0.6599 10 0.6516

What is the Forward Price to purchase a 3.75-year fixed rate Treasury paying 6.4% quarterly, 4 years from now? At t = 0 we have the following discounts: Note: I also used this yield curve data in Exam 1.

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QUESTION 7

Determine the swap rate for a contract swapping fixed for floating rates with:

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R(fixed) for 8 years =

4.08775%

1. payments every six months, maturity of 8 years

2. payments every quarter, maturity of 8 years.

3. What is the difference between the two rates?

t Z 0.25 0.9891 0.5 0.9798

0.75 0.9713 1 0.9633

1.25 0.9553 1.5 0.9473

1.75 0.9392 2 0.931

2.25 0.9227 2.5 0.9143

2.75 0.9059 3 0.8973

3.25 0.8888 3.5 0.8801

3.75 0.8714 4 0.8627

4.25 0.8538 4.5 0.845

4.75 0.8361 5 0.8272

5.25 0.8182 5.5 0.8093

5.75 0.8003 6 0.7913

6.25 0.7823 6.5 0.7733

6.75 0.7643 7 0.7554

7.25 0.7465 7.5 0.7376

7.75 0.7287 8 0.7199

8.25 0.7111 8.5 0.7024

8.75 0.6938 9 0.6852

9.25 0.6767 9.5 0.6683

9.75 0.6599 10 0.6516

Today’s spot curve is given by:

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QUESTION 8

Your firm entered in a 4 year swap, with swap rate of 4.5% and quarterly payments with a notional of $250 million three months

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t Z 0.25 0.9891 0.5 0.9798

0.75 0.9713 1 0.9633

1.25 0.9553 1.5 0.9473

1.75 0.9392 2 0.931

2.25 0.9227 2.5 0.9143

2.75 0.9059 3 0.8973

3.25 0.8888 3.5 0.8801

3.75 0.8714 4 0.8627

and a day ago. This is not a forward swap, meaning the clock for the first exchange starts from the day the contract was signed so the remaining life of the swap is 3.75 years as of today. What is the value of this swap now given that the current yield curve is given by:

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QUESTION 9

t Z 0.25 0.9891 0.5 0.9798

0.75 0.9713 1 0.9633

1.25 0.9553 1.5 0.9473

1.75 0.9392 2 0.931

2.25 0.9227 2.5 0.9143

2.75 0.9059 3 0.8973

3.25 0.8888 3.5 0.8801

3.75 0.8714 4 0.8627

4.25 0.8538 4.5 0.845

4.75 0.8361 5 0.8272

5.25 0.8182 5.5 0.8093

5.75 0.8003 6 0.7913

Your firm entered into a Forward Contract one year ago to buy a T Bond 5 years from that time with a Forward Price of $90.75. What is the value of the contract now? At initiation, the contract was for 2 year fixed rate Treasury paying 4.4% semiannually. Hint: the Forward is now for buying the bond 4 years from now. Assume that the discount factors are now the following:

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QUESTION 10

t Z

0.5 0.9798

1 0.9633

1.5 0.9473

2 0.931

2.5 0.9143

3 0.8973

3.5 0.8801

4 0.8627

Using the following spot rate curve, calculate the corresponding foward yield curve between any time t for maturity six months from that point for all t’s in the table below and also calculate the forward rate for all t’s with a starting point six months from now. and 0.5 & T. That is, calculate the forward discount factors F(0, T, T+5), F(0,0.5, T) for each t = T below.

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