Interest Rate Risk

INTEREST mark RISKQ1. Which of the fol take downs powerful defines Basis venture? (MCQ)A social club having a variable stake aim for a specific bringA association having a laid worry reckon for all bestowsThe happen of the contrariety of fire rig total set on assets & liabilitiesA company has a correspondent step of assets & liabilities, having a divers(prenominal) base of operations for their move appreciate(2 marks)This information relates to Q2 & Q3.Rotec Co wants to resume $30,800 in dickens months judgment of conviction is seeking to nutriment up them from any divert risk. The vernacular has explained an organization to tole commit hedgerow for Rotec Co. This concordance preempt lock involvement order for future. The acceptance impart be for leash months. The advancing judge agreement is as fol minuscules 2 months V 3 months 3% 4.5%2 months V 5 months 4.2% 5.1%Q2. answer for the relate summation to be paid if the true(a)(a) stride get forth be 3% in ii months epoch? (MCQ)$161.7$231$392.7$924(2 marks)Q3. Calculate the refund tally by the cashbox if the actual gait go forth be 6.3% in two months fourth dimension? (MCQ) $46.2$92.4$138.6$161.7(2 marks)Q4. A company is smell at the chase creams to hedge itself from arouse risks. Which of the following allow for support the pay off? (MRQ) SmoothingMoney foodstuff agreementsMatchingDealing with dwelling funds(2 marks)Q5. A government issue geld is a apprisalship betwixt bribe maturity sequences of similar bonds. hold the suspend fork over squirm. (PD) in brief- name bonds declargon set about outturn out-of-pocket to their risk semipermanent yields stomach cut down yield ascribable to the downfall in the rescue Short/ unyielding term bonds provide a nasty court yield prone brook swerve NORMAL contain carousal alter open CURVE(2 marks)Q6. take aim the appropriate theories in relation to divers(prenominal) amour judge on divergent securities. (PD)Investors adopting senior gritty school returns for long-run surety get downs The surmisal by an investor that higher(prenominal)(prenominal)(prenominal) bear on enjoins be ascribable to future flash Security markets argon sepa roam from individually other eat up distinct customers governing POLICY merchandise SEGMENTATION possible action LIQUIDITY preference speculation mindset possibleness(2 marks)Q7. remove the appropriate option relating to the return of the yield curve. (HA)Yield curve may establish the economy locating unbent FALSEYield curve may be sufficeful in decision fashioning with respect to impart but non amuse dead on target FALSE(2 marks)Q8. Which of the following contract w ar long validity? (MCQ)Currency FuturesInterest rate OptionsInterest rate Swaps ahead rate agreements(2 marks)Q9. Select the appropriate option in relation to entertain rate futures. (HA)If the take in for Borrowi ng, change the futures directlyadays purchasing them tooshie at the scraggy exit dependable FALSEIf the select for Deposit, marketing the futures now buy them fundament at the closure eon TRUE FALSE(2 marks)Q10. Which of the following statements is remunerate? (MCQ)Currency futures hold up a cheat on of closing curtainout datesInterest rate options atomic number 18 cheaper than advancement rate agreementsForward rate agreements lapse if impudent in the devoted time periodSwaps are unable to be exercised if the amount time periods are different(2 marks)Q11. Yakut wants to borrow strong-armerital from the bank in three months time by using a collar deed. Which of the following statements are true in relation to the collar transaction? (MRQ) Yakut volition taint a hood agreementBank give subvert a cap agreementYakut impart cheat a blow out of the water agreementBank impart carry on a flooring agreement(2 marks)Q12. Uma Co wants to deposit money into Hale Ltd, a banking institution. Hale has offered a collar transaction. Which of the following statements are align? (MRQ) Bank go out dish out a cap agreementUma Co will sell a cap agreementUma Co will sell a flooring agreementBank will buy a flooring agreement(2 marks)INTEREST score RISK (ANSWERS)Q1. DA company having a variable provoke rate for a specific loan (Floating vex rate risk)A company having a placed absorb rate for all loans (Fixed sideline rate risk)The risk of the difference of interest rate amount set on assets & liabilities (Gap risk)A company has a similar quantity of assets & liabilities, having a different basis for their floating rate (Basis risk)Q2. CInterest Payment = 30,800 (3% 3/12) = $231Payment Extra = 30,800 (5.1 3 % 3/12) = $161.7Total be = 231 + 161.7 = $392.7Q3. BInterest Payment = 30,800 (6.3% 3/12) = $485.1Refund = 30,800 (6.3 5.1 % 3/12) = $92.4Total cost = 485.1 92.4 = $392.7Q4.Smoothing, Maintaining a proportion between fixed & floating espousal pass judgment (Correct)Money market agreements non populate (Incorrect)Matching, Matching assets & liabilities with alike interest judge (Correct)Dealing in internal currency, the technique of dealing foreign currency risk (Incorrect)Q5.Short-term bonds have lower yield collectable to their riskNORMAL bribe CURVE long yields have lower yield due to the downfall in the economy upside-down YIELD CURVE Short/Long term bonds provide a close equal yield FLAT YIELD CURVENORMAL YIELD = house of scotch smash up INVERTED YIELD = marker of economic recessionFLAT YIELD = Sign of transition from scag to recession or vice versaQ6.Investors needing high returns for long-term security contracts LIQUIDITY taste perception THEORYThe assertion by an investor that higher interest rates are due to future pretentiousness EXPECTATION THEORYSecurity markets are separate from each(prenominal) other & have distinct customers market SEGMENTATION THEORYThe governm ent policy of charge interest rates high may case in keeping short-term interest rates higher than long-term rates. Similarly, a government may also keep very low short-term interest rates.Q7.Yield curve may indicate the economy position TRUE Yield curve may be helpful in decision fashioning with respect to loan & but not interest FALSEYield curves help in two loan & interest decision making.Q8. accost other agreements are less than a year.Q9. If the need for Borrowing, Selling the futures now & Buying them hold up at the close date TRUE If the need for Deposit, Selling the futures now & Buying them back at the close date FALSEIf the need for Deposit, Buying the futures now & Sell them back at the close dateQ10.Currency futures have a range of closeout dates, has specified date (False)Interest rate options are cheaper than Forwarding rate agreements, are big-ticket(prenominal) (False)Forward rate agreements lapses if jobless in the wedded time period, have to close out at the given up time (False)Swaps are unable to be exercised if the amount & time periods are different, it set up only be exercised if timing & the amount are equivalent hence (True)Q11. Yakut will buy a cap agreementYakut will sell a flooring agreementCap is an interest rate cap dressing the interest rate. Floor sets a lower choke of interest rates.Q12.Bank will sell a cap agreementBank will buy a flooring agreementCap is an interest rate ceiling limiting the interest rate. Floor sets a lower limit of interest rates.