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Hull: Options, Futures and Other Derivatives, Ninth Edition Chapter 6: Interest Rate Futures Multiple Choice Test Bank: Questions and Answers 1. Which of following is applicable to corporate bonds in the United States? A. Actual/360 B. Actual/Actual C. 30/360 D. Actual/365 Answer: C Corporate bonds in the U.S are usually quoted with a 30/360 day count. This means that there are assumed to be 30 days per month and 360 days per year when the length of an accrual period is calculated. 2. It is May
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  Hull: Options, Futures and Other Derivatives, Ninth EditionChapter 6: Interest Rate FuturesMultiple Choice Test Ban: !uestions and ns#ers 1.Which of following is applicable to corporate bonds in the United States?A.Actual/360 B.Actual/Actual .30/360 !.Actual/36 Answer# orporate bonds in the U.S are usuall$ %uoted with a 30/360 da$ count.  &his 'eans that there are assu'ed to be 30 da$s per 'onth and 360 da$sper $ear when the length of an accrual period is calculated. (.)t is *a$ 1. &he %uoted price of a bond with an Actual/Actual +in period, da$ count and 1(- per annu' coupon +paid se'iannuall$, in the United States is 10 . )t has a face alue of 100 and pa$s coupons on April 1 and ctober 1. What is the cash price?A.106.00B. 106.0(.10 .!. 106.02Answer#  &he cash price is the %uoted price plus accrued interest. &here are 30 actual da$s between April 1 and *a$ 1 and 13 actual da$s between April 1 and ctober 1. )n this case the %uoted price is 10 and the accrued interest is 0.0610030/1340.. &he answer is therefore 10 ..3.)t is *a$ 1. &he %uoted price of a bond with a 30/360 da$ count and 1(- per annu' coupon in the United States is 10 . )t has a face alue of 100 and pa$s coupons on April 1 and ctober 1. What is the cash price?A. 106.00B. 106.0(.10 .!. 106.02Answer# A &he cash price is the %uoted price plus accrued interest. &here are 30 assu'ed da$s between April 1 and *a$ 1 and 10 assu'ed da$s between April 1 and ctober 1. )n this case the %uoted price is 10 and the accrued interest is 0.0610030/10 4 1.00. &he answer is therefore 106.00.  2.&he 'ost recent settle'ent bond futures price is 103. . Which of the following four bonds is cheapest to delier? A.5uoted bond price 4 110 conersion factor 4 1.0200. B.5uoted bond price 4 160 conersion factor 4 1. (00. .5uoted bond price 4 131 conersion factor 4 1.( 00. !.5uoted bond price 4 123 conersion factor 4 1.3 00. Answer#  &he cost of deliering a bond is the %uoted bond price 'inus the 'ost recent settle'ent price ti'es the conersion factor. &his is (.367 (.67 1.6( 7 and 3.(8 for bonds in A7 B7 7 and !7 respectiel$. &he bond in  is therefore cheapest to delier. .Which of the following is 9&   an option open to the part$ with a short position in the &reasur$ bond futures contract? A.&he abilit$ to delier an$ of a nu'ber of di:erent bonds B.&he wild card pla$ .&he fact that delier$ can be 'ade an$ ti'e during the delier$ 'onth!.&he interest rate used in the calculation of the conersion factor Answer# !A7 B7 and  describe options that the part$ with the short position has. ! does not6.A trader enters into a long position in one ;urodollar futures contract. <ow 'uch does the trader gain when the futures price %uote increases b$ 6 basis points?A. =6B. =1 0.=60 !. =600 Answer# B &he trader gains =( for each basis point. &he gain is therefore ( 6 or =1 0.8.&he bonds that can be deliered in a &reasur$ bond futures contract areA.Assets that proide no inco'eB.Assets that proide a >nown cash inco'e.Assets that proide a >nown $ield!.9one of the aboe Answer# BA bond is an asset that proides a >nown cash inco'e +the coupons,  .An ultra &bond futures contract is one whereA.Bonds with 'aturities less than 3 $ears can be delieredB.Bonds with 'aturities less than 10 $ears can be deliered.Bonds with 'aturities greater than 1 $ears can be deliered!.Bonds with 'aturities greater than ( $ear can be delieredAnswer# !)n the ultra &bond futures contract bonds with 'aturities oer ( $ears can be deliered..A portfolio is worth =(270007000. &he futures price for a &reasur$ note futurescontract is 110 and each contract is for the delier$ of bonds with a face alue of =1007000. n the delier$ date the duration of the bond that is e@pected to be cheapest to delier is 6 $ears and the duration of the portfolio will be . $ears. <ow 'an$ contracts are necessar$ for hedging the portfolio? A.100B.(00.300!.200Answer# B &he contract price is 1107000. &he nu'ber of contracts is +(270007000 . ,/+11070006.0,4(0010.Which of the following is true? A.&he futures rates calculated fro' a ;urodollar futures %uote are alwa$sless than the corresponding forward rate B.&he futures rates calculated fro' a ;urodollar futures %uote are alwa$sgreater than the corresponding forward rate .&he futures rates calculated fro' a ;urodollar futures %uote should e%ual the corresponding forward rate !.&he futures rates calculated fro' a ;urodollar futures %uote are so'eti'es greater than and so'eti'es less than the corresponding forward rate Answer# B &he futures rate 'ust be reduced b$ what is >nown as a cone@it$ adust'ent to get the forward rate.11.<ow 'uch is a basis point?A.1.0-B.0.1-.0.01-!.0.001-  Answer# A basis point is 0.01-.1(.Which of the following da$ count conentions applies to a US &reasur$ bond?A.Actual/360 B.Actual/Actual +in period,.30/360 !.Actual/36 Answer# BActual/Actual +in period, is used for US &reasur$ bonds. &his 'eans that the interest earned during a period that lies between two coupon pa$'entdates is calculated b$ diiding the actual nu'ber of da$s in the period b$ the nu'ber of da$s between the coupon pa$'ents and 'ultipl$ing the result b$ the ne@t coupon pa$'ent13.What is the %uoted discount rate on a 'one$ 'ar>et instru'ent?A.&he interest rate earned as a percentage of the nal face alue of abondB.&he interest rate earned as a percentage of the initial price of a bond.&he interest rate earned as a percentage of the aerage price of abond !.&he ris>free rate used to calculate the present alue of future cashCows fro' a bondAnswer# A &he %uoted discount rate is the interest earned as a percentage of thenal face alue12.Which of the following is closest to the duration of a ($ear bond that pa$s a coupon of - per annu' se'iannuall$? &he $ield on the bond is 10- per annu' with continuous co'pounding. A.1.(B.1. .1.!.1.(Answer#  &he duration of the bond is the weighted aerage of the ti'es when cash Cows are receied with weights proportional to the present alues of the cashCows. &his is
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