Test Bank For Options Futures and Other Derivatives 10th Edition By JohnC.

Chapter 6: Interest Rate Futures

Multiple Choice Test Bank: Questions and Answers

Which of following is applicable to corporate bonds in the United States?

Actual/360

Actual/Actual

30/360

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.

It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12% per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?

A.  106.00

B. 106.02

C. 105.98

D.  106.04

Answer: C

The cash price is the quoted price plus accrued interest. There are 30 actual days between April 1 and May 1 and 183 actual days between April 1 and October 1.  In this case the quoted price is 105 and the accrued interest is 0.06×100×30/183=0.98. The answer is therefore 105.98.

It is May 1. The quoted price of a bond with a 30/360 day count and 12% per annum coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?\

 A.  106.00

B. 106.02

C. 105.98

D.  106.04

Answer: A

The cash price is the quoted price plus accrued interest. There are 30 assumed days between April 1 and May 1 and 180 assumed days between April 1 and October 1. In this case the quoted price is 105 and the accrued interest is 0.06×100×30/180 = 1.00. The answer is therefore 106.00.

The most recent settlement bond futures price is 103.5. Which of the following four bonds is cheapest to deliver?

Quoted bond price = 110; conversion factor = 1.0400.

Quoted bond price = 160; conversion factor = 1.5200.

Quoted bond price = 131; conversion factor = 1.2500.

Quoted bond price = 143; conversion factor = 1.3500.

Answer:  C

The cost of delivering a bond is the quoted bond price minus the most recent settlement price times the conversion factor. This is 2.36, 2.68, 1.625, and 3.275 for bonds in A, B, C, and D, respectively. The bond in C is therefore cheapest to deliver.

Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract?

The ability to deliver any of a number of different bonds

The wild card play

The fact that delivery can be made any time during the delivery month

The interest rate used in the calculation of the conversion factor

Answer: D

A, B, and C describe options that the party with the short position has. D does not

A trader enters into a long position in one Eurodollar futures contract. How much does the trader gain when the futures price quote increases by 6 basis points?

A.    $6

B.  $150

C. $60

D.    $600

Answer: B

The trader gains $25 for each basis point. The gain is therefore 25×6 or $150.

The bonds that can be delivered in a Treasury bond futures contract are

Assets that provide no income

Assets that provide a known cash income

Assets that provide a known yield

None of the above

       Answer: B

A bond is an asset that provides a known cash income (the coupons)

An ultra T-bond futures contract is one where

Bonds with maturities less than 3 years can be delivered

Bonds with maturities less than 10 years can be delivered

Bonds with maturities greater than 15 years can be delivered

Bonds with maturities greater than 25 year can be delivered

Answer: D

In the ultra T-bond futures contract bonds with maturities over 25 years can be delivered.

A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 5.5 years. How many contracts are necessary for hedging the portfolio?

100

200

300

400

Answer: B

The contract price is 110,000. The number of contracts is (24,000,000×5.5)/(110,000×6.0)=200