Hedge.Academy@gmail.com - (+84)0869231510 - https://www.facebook.

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Hedge.Academy@gmail.com - (+84)0869231510 - https://www.facebook.com/hedgeacademyvn/

Questions & Answers:

1. Suppose a lender quotes the interest rate on a $1,000 loan as 9.0% per annum with
continuous compounding but the interest is actually paid monthly. What are the monthly
interest payments?
a) $7.47
b) $7.50
c) $7.53
d) $7.59

2. Assume the following theoretical continuously compounded spot rates: 2.0% at 0.5 years;
3.0% at 1.0 year; 4.0% at 1.5 years; and 5.0% at 2.0 years. What is the two-year PAR
YIELD with continuous compounding?
a) 4.88%
b) 4.94%
c) 5.00%
d) 5.04%

3. Which of the following is TRUE about a forward rate agreement (FRA)?

a) It is an exchange-traded instrument
b) It can be cash or physically settled
c) A borrower who intends to borrow cash at LIBOR in the future will hedge by receiving
the fixed interest rate, R(k), in an FRA
d) A bank that intends to lend cash at LIBOR in the future will hedge by receiving the
fixed interest rate, R(k), in an FRA

4. Each of the following is TRUE with respect to duration and convexity EXCEPT:
a) Both modified and Macaulay duration are denoted in units of “years”
b) To estimate bond price change with both duration and convexity, per two-term Taylor
series, is still to employ a single-factor measure of sensitivity that assumes a parallel
shift in the yield curve
c) With respect to a plain vanilla bond (without embedded options), bond convexity
increases with maturity, decreases with coupon rate and decreases with yield
d) At low yields, a callable bond exhibits negative convexity and therefore negative
duration

5. Under discounting continuously (i.e., discounting at a continuously compounded rate) the

current price of a $1,000 par 20-year zero-coupon bond is $204. What is the bond’s implied
continuous yield?
a) 7.95%
b) 7.98%
c) 8.00%
d) 8.02%

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