3、The effective annual yield (EAY) of a loan with a quoted rate of 8%, compounded quarterly is equivalent to the EAY of a loan with a continuously compounded quoted rate of:

A) 8.16%.
 
B) 8.08%.
 
C) 7.92%.
 
D) 8.24%.

The correct answer is C

For the quarterly compounded loan, EAY = (1 + (0.08 / 4))4 ? 1 = 0.824. For the continuously compounded loan, we want to find the value of r that solves 1.0824 = er(1). r = ln(1.0824) = 0.0792.

AIM 4: Explain and apply the linear yield interpolation and piecewise cubic methods for estimating complete discount functions.

1、A method for interpolating discount rates between known instruments that smoothes curves and avoids discontinuities is known as:

A) cubic linear approximation. 
 
B) cubic spline approximation. 
 
C) convexity approximation.
 
D) concavity approximation.

The correct answer is B

Piecewise cubic spline functions are used to interpolate discount rate curves between existing securities.