FINM7405 Financial Risk Management Tutorial 2 Questions

Java Python FINM7405

Financial Risk Management

Tutorial 2 Questions

Question 1

‘In a normal floating rate note, an interest rate cap is beneficial to the bondholder whereas an interest rate floor is beneficial to the bond issuer.’

Do you agree with this statement? Why or why not?

Question 2

A U.S. 2-year Treasury note, which was issued 1.5 years ago, still has 6 months remaining to maturity. Is the price of this Treasury note slightly lower than, equal to or higher than a 2-year Treasury note that has just been issued? Briefly state your reason.

Question 3

‘Under the pure expectations theory, if the yield curve is upward-sloping, the market must expect an increase in future short-term interest rates.’

Do you agree with this statement? Why or why not?

Question 4 (Multiple choice question, select the most likely answer):

The market segmentation theory suggests that:

a) The shape of the yield curve is determined by how investors expect future short-term rates to be.

FINM7405 Financial Risk Management Tutorial 2 Questions b) The yield curve reflects the maturity demands of financial institutions and investors.

Question 5 (Multiple choice question)

Which of the followings is most likely to be true in describing the relationship between the nation’s economy and default spreads?

a) Default spreads and economy is not correlated

b) Default spreads tend to decrease during economy expansions because company cash flows are expected to increase

c) Default spreads tend to increase during economy expansions because companies invest more in speculative, risky projects.

Question 6 (Multiple choice question)

Which of the followings is most likely to be true in describing the relationship between liquidity risk and bond yield relative to the Treasury bond? All else being equal, bonds that are:

a) Less liquid have lower yield compared to Treasury bonds

b) More liquid have higher yield compared to Treasury bonds

c) Less liquid have higher yield compared to Treasury bonds

Question 7

‘Default spread is equivalent to term spread; these two terms are used interchangeably and imply the same thing