'Interest Rate Risk\r'

'INTEREST RATE RISKQ1. Which of the following correctly defines cornerstone Risk? (MCQ)A gild having a variable gratify esteem for a special(prenominal) addA company having a fixed stake regulate for all loansThe adventure of the difference of c atomic number 18 judge amount correct on assets & ampere; liabilitiesA company has a interchangeable quantity of assets & liabilities, having a unlike earth for their go stride(2 marks)\r\nThis information relates to Q2 & Q3.Rotec Co wants to scoop up $30,800 in ii months eon ; is seeking to yet them from any engross risk. The bank has explained an agreement to house hedging for Rotec Co. This agreement can lock kindle range for approaching. The borrowing ordain be for tercet months. The forward rate agreement is as follows: 2 months V 3 months 3% †4.5%2 months V 5 months 4.2% †5.1%\r\nQ2. matter the sake amount to be paid if the importive rate allow for be 3% in two months prison term? (MCQ)$ 161.7$231$392.7$924(2 marks)\r\nQ3. 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)\r\nQ4. A company is looking at the following survivals to hedge itself from interest risks. Which of the following will support the cause? (MRQ) SmoothingMoney market agreementsMatchingDealing with home currency(2 marks)\r\nQ5. A repay curve is a proportionship among allot ; maturity bodyguards of similar bonds. Select the catch yield curve. (P;D) ill-considered-term bonds be possessed of depress yield payable to their risk Long-term yields have lower yield due to the downfall in the thriftiness wretched/Long †term bonds provide a completion down equal yield FLAT m different bring down NORMAL fork up CURVE INVERTED damp CURVE(2 marks)\r\nQ6. Select the appropriate theories in relation to different interest judge on different securities. (P;D)Investors needing elevated returns for long-run securi ty contracts The assumption by an investor that racyer(prenominal) interest grade be due to future inflation Security markets are separate from each other ; have distinct customers GOVERNMENT form _or_ system of government commercialise SEGMENTATION supposition LIQUIDITY gustatory modality THEORY foretaste THEORY(2 marks)\r\nQ7. Select the appropriate option relating to the usefulness of the yield curve. (HA)Yield curve may signalize the economy position rightful(a) FALSEYield curve may be helpful in decision qualification with respect to loan ; but not interest TRUE FALSE(2 marks)\r\nQ8. Which of the following contract have long-term validity? (MCQ)Currency FuturesInterest rate OptionsInterest rate Swaps Forward rate agreements(2 marks)\r\nQ9. Select the appropriate option in relation to interest rate futures. (HA)If the need for Borrowing, carrying the futures direct ; bargain foring them back at the most date TRUE FALSEIf the need for Deposit, sell the futures at a time ; Buying them back at the close date TRUE FALSE(2 marks)\r\nQ10. Which of the following statements is correct? (MCQ)Currency futures have a direct of close let out datesInterest rate options are cheaper than Forwarding rate agreementsForward rate agreements lapse if unused in the given time periodSwaps are inefficient to be exercised if the amount ; time periods are different(2 marks)\r\nQ11. Yakut wants to borrow money from the bank in three months time by using a collar transaction. Which of the following statements are true in relation to the collar transaction? (MRQ) Yakut will buy a cap agreementBank will buy a cap agreementYakut will sell a ball over agreementBank will sell a base agreement(2 marks)\r\nQ12. genus 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 trading fl oor 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)\r\nQ2. CInterest compensation = [30,800 à (3% à 3/12)] = $231Payment Extra = [30,800 à ({5.1 †3} % à 3/12)] = $161.7Total salute = 231 + 161.7 = $392.7\r\nQ3. BInterest Payment = [30,800 à (6.3% à 3/12)] = $485.1Refund = [30,800 à ({6.3 †5.1} % à 3/12)] = $92.4Total cost = 485.1 †92.4 = $392.7\r\nQ4.Smoothing, Maintaining a balance between fixed & floating borrowing rates (Correct)Money market agreements not know (Incorrect)Matching, Matching assets & liabilities with same interest rates (Correct)Dealing in home currency, the technique of dealing remote currency risk (Incorrect)\r\nQ5.Short-term bonds have lower yield due to their riskNORMAL YIELD CURVE  Long-term yields have lower yield due to the downfall in the economy INVERTED YIELD CURVE Short/Long †term bonds provide a close equal yield FLAT YIELD CURVENORMAL YIELD = Sign of economic boom INVERTED YIELD = Sign of economic recessionFLAT YIELD = Sign of rebirth from boom to recession or vice versa\r\nQ6.Investors needing high returns for long-term security contracts LIQUIDITY PREFERENCE THEORY\r\nThe assumption by an investor that higher interest rates are due to future inflation   EXPECTATION THEORY\r\nSecurity markets are separate from each other & have distinct customers  MARKET SEGMENTATION THEORY\r\nThe government policy of retentiveness interest rates high may effect in keeping short-term interest rates higher than long-term rates. Similarly, a government may also keep very lo w short-term interest rates.\r\nQ7.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.\r\nQ8. CAll other agreements are less than a year.\r\nQ9. 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 date\r\nQ10.Currency futures have a range of closeout dates, has condition date (False)Interest rate options are cheaper than Forwarding rate agreements, are expensive (False)Forward rate agreements lapses if unused in the given 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 ar e same hence (True)\r\nQ11. Yakut will buy a cap agreementYakut will sell a flooring agreementCap is an interest rate detonating device limiting the interest rate. Floor sets a lower limit of interest rates.\r\nQ12.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.\r\n'