Hull:Options,FuturesandOtherDerivatives,NinthEditionChapter4:InterestRatesMultipleChoiceTestBank:QuestionswithAnswers1.ThecompoundingfrequencyforaninterestratedefinesA.ThefrequencywithwhichinterestispaidB.AunitofmeasurementfortheinterestrateC.TherelationshipbetweentheannualinterestrateandthemonthlyinterestrateD.NoneoftheaboveAnswer:BThecompoundingfrequencyisaunitofmeasurement.Thefrequencywithwhichinterestispaidmaybedifferentfromthecompoundingfrequencyusedforquotingtherate.2.Aninterestrateis6%perannumwithannualcompounding.Whatistheequivalentratewithcontinuouscompounding?A.5.79%B.6.21%C.5.83%D.6.18%Answer:CTheequivalentratewithcontinuouscompoundingisln(1.06)=0.0583or5.83%.3.Aninterestrateis5%perannumwithcontinuouscompounding.Whatistheequivalentratewithsemiannualcompounding?A.5.06%B.5.03%C.4.97%D.4.94%Answer:ATheequivalentratewithsemiannualcompoundingis2×(e0.05/2−1)=0.0506or5.06%.4.Aninterestrateis12%perannumwithsemiannualcompounding.Whatistheequivalentratewithquarterlycompounding?A.11.83%B.11.66%C.11.77%D.11.92%Answer:ATheequivalentrateperquarteris.Theannualizedratewithquarterlycompoundingisfourtimesthisor11.83%.5.Thetwo-yearzerorateis6%andthethreeyearzerorateis6.5%.Whatistheforwardrateforthethirdyear?Allratesarecontinuouslycompounded.A.6.75%B.7.0%C.7.25%D.7.5%Answer:DTheforwardrateforthethirdyearis(3×0.065−2×0.06)/(3−2)=0.075or7.5%.6.Thesix-monthzerorateis8%perannumwithsemiannualcompounding.Thepriceofaone-yearbondthatprovidesacouponof6%perannumsemiannuallyis97.Whatistheone-yearcontinuouslycompoundedzerorate?A.8.02%B.8.52%C.9.02%D.9.52%Answer:CIftherateisRwemusthaveorsothatR=ln(1/0.9137)=0.0902or9.02%.7.Theyieldcurveisflatat6%perannum.WhatisthevalueofanFRAwheretheholderreceivesinterestattherateof8%perannumforasix-monthperiodonaprincipalof$1,000startingintwoyears?Allratesarecompoundedsemiannually.A.$9.12B.$9.02C.$8.88D.$8.63Answer:DThevalueoftheFRAisthevalueofreceivinganextra0.5×(0.08−0.06)×1000=$10in2.5years.Thisis10/(1.035)=$8.63.8.Underliquiditypreferenc...
