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FINS2624-Portfolio Mgmt - s1/2013

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Take Test: Online quiz 2

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This quiz goes offline 23.59 on April 5.

Instructions
Multiple Attempts This Test allows 3 attempts. This is attempt number 1.
Force Completion This Test can be saved and resumed later.

Question 1

10 points

Suppose a zero-coupon bond maturing in one year with a face value of $100 costs $97 today. A zero-coupon
bond maturing in two years time with a face value of $1000 costs $890 today. What is the arbitrage-free price
of a bond maturing in two years time with a face value of $100 and an annual coupon of $5? Give your
answer with two decimal points precision.

Question 2

10 points

The expectations theory of the term structure of interest rates states that
forward rates are market expectations of future interest rates.
forward rates may exceed market expectations of future interest rates.
yields on bonds with different times to maturity are determined by the
supply and demand for the securities.
A and B.
A, B and C.

Question 3

10 points

Suppose you have an investment horizon of 3 years and hold a 5 year zero-coupon bond. You would be
facing:
A. Reinvestment risk
B. Liquidity risk
C. A and B
D. None of the above

Question 4

10 points

Suppose you want to find the arbitrage-free forward rate between time 1 and 2, f . What information would
12
be sufficient?

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A - The price of a two-year bond with an annual coupon payment of $10 and a face value of $100.
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B - The price of a two-year bond with Test/Surv
an annual coupon
payment of $20 and a face value of $100.
C - The price of a one-year zero-coupon bond with a face value of $100.
1. A and B
2. A and C
3. B and C
4. Any of the above combinations.
5. None of the above combinations

Question 5

10 points

Which of the following are valid reasons why the yield on bonds with long
times to maturity may include a liquidity premium?
Encourage investors with short investment horizons to invest in long
maturity bonds
Investors face uncertain holding period returns due to liquidity risk
Investors are risk averse
All of the above
B and C

Question 6

10 points

Suppose you observe the three following bonds in the market:

A two-year zero-coupon bond with a face value of $100 trading for $89.00
A two-year bond with a face value of $100 and a $10 coupon trading for $107.51
A two-year bond with a face value of $100 and a $20 coupon trading for $127.53
Which of the following statements is true?
A. There is a possible arbitrage trade involving a long position in bond C
B. There is a possible arbitrage trade involving a short position in bond C
C. There is a possible arbitrage trade not involving bond C at all
D. There are no arbitrage opportunities in this market

Question 7

10 points

Suppose you observe the following interest rates in the market:

y = 6%
3
f = 6%
12
f = 5%
13
What is the arbitrage-free two-year spot rate, y ?
2
5%
6%
7%
8%

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Question 8

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Suppose you observe the following two bonds in the market:

A one-year zero-coupon bond with a face value of $1000 trading at $900.
A two-year bond paying an annual coupon of $120 and a face value of $1000 trading at par.
What can you conclude about the arbitrage-free forward rate between times 1 and 2, f ?
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It is 12%
It is 13%
It is 14%
You cannot say

Question 9

10 points

Which of the following are important differences between the theoretical concept of the term structure of
interest as we've discussed it in class, and the zero-coupon interest rates of government bonds we use to
approximate it, e.g. in slide two of lecture two?
A. Real world zero-coupon bonds have at least some default risk.
B. Real world zero-coupon interest rates are typically expressed in nominal rather than real terms, i.e. they
include an inflation part.
C. Zero-coupon bonds are not traded in Australia.
D. A and B
E. A and C
F. All of the above

Question 10

10 points

One way of interpreting the term structure of interest rates is that it shows
the relationship between:
the yield on zero-coupon bonds and the duration of those bonds.
the coupon rates of bonds and time to maturity of those bonds.
the yield on zero-coupon bonds and the time to maturity of those bonds.
All of the above.
None of the above.

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