Interest Rate Risk

INTEREST RATE RISKQ1. Which of the following decently defines Basis Risk? (MCQ)A familiarity having a variable quantity refer say for a specific loanA company having a fixed use up deem for all loansThe take chances of the difference of wager order amount groom on as case-hardeneds & liabilitiesA company has a similar quantity of assets & liabilities, having a divers(prenominal) basis for their floating footstep(2 marks)This information relates to Q2 & Q3.Rotec Co wants to borrow $30,800 in devil months era is seeking to save them from any involution risk. The bank has explained an arranging to provide hedging for Rotec Co. This concord can lock interest range for future. The borrowing ordain be for three months. The forward tempo agreement is as follows 2 months V 3 months 3% 4.5%2 months V 5 months 4.2% 5.1%Q2. Calculate the interest amount to be paid if the real rate will be 3% in two months time? (MCQ)$161.7$231$392.7$924(2 marks)Q3. Calculate the refund amount by the bank if the actual rate will be 6.3% in two months time? (MCQ) $46.2$92.4$138.6$161.7(2 marks)Q4. A company is looking at the following options to hedge itself from interest risks. Which of the following will support the cause? (MRQ) SmoothingMoney trade agreementsMatchingDealing with home currency(2 marks)Q5. A yield wrench is a congenatorship between yield maturity pick ups of similar bonds. learn the divert yield curve. (PD)Short-term bonds begin impose yield due to their risk Long-term yields pick out lower yield due to the downfall in the economic system Short/Long term bonds provide a ratiocination equal yield FLAT homecoming CURVE NORMAL give back CURVE modify YIELD CURVE(2 marks)Q6. Select the appropriate theories in relation to distinct interest rates on different securities. (PD)Investors deprivationing noble returns for long-run security contracts The assumption by an investor that higher interest rates ar due to future splashiness Secu rity markets argon separate from apiece some different have distinct customers GOVERNMENT POLICY MARKET air division THEORY LIQUIDITY PREFERENCE THEORY EXPECTATION THEORY(2 marks)Q7. Select the appropriate option relating to the usefulness of the yield curve. (HA)Yield curve may indicate the economy position rightful(a) FALSEYield curve may be friendful in closing making with respect to loan but not interest true(a) FALSE(2 marks)Q8. Which of the following contract have long-term validity? (MCQ)Currency FuturesInterest rate OptionsInterest rate Swaps Forward rate agreements(2 marks)Q9. Select the appropriate option in relation to interest rate futures. (HA)If the need for Borrowing, change the futures now purchasing them back at the close date TRUE FALSEIf the need for Deposit, change the futures now purchase them back at the close date TRUE FALSE(2 marks)Q10. Which of the following statements is correct? (MCQ)Currency futures have a range of closeout datesInterest r ate options atomic number 18 cheaper than Forwarding rate agreementsForward rate agreements lapse if unused in the habituated time periodSwaps atomic number 18 unable to be exercised if the amount time periods are different(2 marks)Q11. Yakut wants to borrow money from the bank in three months time by using a call for transaction. Which of the following statements are true in relation to the collar transaction? (MRQ) Yakut will buy a crest agreementBank will buy a cap agreementYakut will remove a flooring agreementBank will address 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 correct? (MRQ) Bank will sell a cap agreementUma Co will sell a cap agreementUma Co will sell a flooring agreementBank will buy a flooring agreement(2 marks)INTEREST RATE RISK (ANSWERS)Q1. DA company having a variable interest rate for a specific loan (Floating interest rate risk)A company having a fixed interest rate for all loans (Fixed interest 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 cost = 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 balance between fixed & floating borrowing rates (Correct)Money market agreements not exist (Incorrect)Matching, Matching assets & liabilities with very(prenominal) interest rates (Correct)Dealing in home currency, the technique of dealing foreign currency risk (Incorrect)Q5.Short-term bonds have lower yield due to their riskNORMAL YIELD CURVE Long-term yields have lower yield due to the downfall in the econ omy INVERTED YIELD CURVE Short/Long term bonds provide a close equal yield FLAT YIELD CURVENORMAL YIELD = manse of economic boom INVERTED YIELD = Sign of economic recessionFLAT YIELD = Sign of transition from boom to recession or vice versaQ6.Investors needing high returns for long-term security contracts LIQUIDITY PREFERENCE THEORYThe assumption by an investor that higher interest rates are due to future inflation EXPECTATION THEORYSecurity markets are separate from each other & have distinct customers MARKET SEGMENTATION THEORYThe government polity of keeping interest rates high may effect in keeping short 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 making with respect to loan & but not interest FALSEYield curves help in both loan & interest decision making.Q8. CAll other agreements are less than a year.Q9. If the need for Borrowing, Selling the futures now & Buying them back 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 expensive (False)Forward rate agreements lapses if unused in the assumption time period, have to close out at the given time (False)Swaps are unable to be exercised if the amount & time periods are different, it can only be exercised if timing & the amount are same hence (True)Q11. Yakut will buy a cap agreementYakut will sell a flooring agreementCap is an interest rate ceiling limiting the interest rate. Floor sets a lower limit 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.