University:
CFA Institute
Course:
CFA Level 2 - Derivative Investments
Academic year:

2023
Views:

7

Pages:

4
Author:

anon

CFA Level 2 - Derivative Investments Session 17-Reading 64 Interest Rate Derivative Instruments-LOS a (Practice Questions, Sample Questions) 1. A cap on a floating rate note, from the bondholder’s perspective, is equivalent to: A) owning a series of calls on fixed income securities. B) writing a series of interest rate puts. C) writing a series of puts on fixed income securities (C) For a bondholder, a cap, which puts a maximum on floating rate interest payments, is equivalent to writing a series of puts on fixed income securities. These would require the buyer to pay when rates rise and bond prices fall, negating interest rate increases above the cap rate. Writing a series of interest rate calls, not puts, would be an equivalent strategy. Calls on fixed income securities would pay when rates decrease, not when they increase 2. A floor on a floating rate note, from the bondholder’s perspective, is equivalent to: A) owning a series of puts on fixed income securities. B) writing a series of interest rate puts. C) owning a series of calls on fixed income securities (C) A floor, which puts a minimum on floating rate interest payments is equivalent to owning calls on fixed income securities which will pay when interest rates fall. Owning interest rate puts, rather than writing them, would be equivalent to the floor. Puts on fixed income securities pay when interest rates increase 3. An issuer who wishes to issue a floating rate note with a collar would be equivalently issuing the note and: A) buying a cap and selling a floor. B) selling a cap and buying a floor. C) buying a cap and a floor (A) Issuing a floating rate note with a collar (a cap and a floor) is equivalent to issuing the note, buying a cap to put an upper limit on the interest cost, and selling a floor which would put a minimum on interest expense and offset the cost of the cap to some extent 4. Which of the following best describes an interest rate cap? An interest rate cap is a package or portfolio of interest rate options that provide a positive payoff to the buyer if the: A) T-Bond futures exceeds the strike price. B) reference rate is below the strike rate. C) reference rate exceeds the strike rate (C) An interest rate cap is a package of European-type call option (called caplets) on a reference interest rate 5. Bower shorts the floating rate bond given in Table 2. Which of the following will best reduce Bower's interest rate risk? A) Buying an interest rate floor. B) Shorting Eurodollar futures. C) Shorting an interest rate floor (B) If he adds a short position in Eurodollar futures to the existing liability in the correct amount, he is able to lock in a specific interest rate. A short Eurodollar position will increase in value if interest rates rise because the contract is quoted as a discount instrument so increases in rates reduce the futures price 6. To the issuer of a floating rate note, a cap is equivalent to: A) writing a series of interest rate calls. B) owning a series of interest rate calls. C) owning a series of calls on a fixed income security (B) The issuer of the note is borrowing at a floating rate, and will have higher interest expenses if rates increase. A cap is equivalent to owning a series of interest rate calls at the cap rate that will pay the difference between the market rate and the cap rate. If interest rates increase, the payoff from the calls will compensate the borrower for the higher interest expenses

Session 17 - Reading 64 Interest Rate Derivative Instruments-LOS a

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