LOS d, (Part 2): Describe the characteristics of forward contracts on zero-coupon and coupon bonds.

Q1. Which of the following is least likely a characteristic of bond forward contracts?

A)   Prices are stated as yield to maturity, including accrued interest.

B)   Contracts can be written on bonds with embedded options.

C)   Contracts must settle before the bond matures.

Q2. The settlement price of a deliverable forward contract at 6% on a $1 million 90-day Treasury bill would be:

A)   determined by the market rates at expiration.

B)   $985,000.

C)   $940,000.

Q3. The price of a 90-day forward contract on a 90-day Treasury bill will be:

A)   above the current price of a 90-day T-bill.

B)   above the current price of a 180-day T-bill.

C)   either above or below the current price of a 180-day T-bill.

Q4. The forward contract price of a coupon-bearing bond is typically quoted as:

A)   a discount to the face value.

B)   the bond dollar-price plus accrued interest as of the settlement date.

C)   a yield to maturity at the settlement date.

LOS d, (Part 2): Describe the characteristics of forward contracts on zero-coupon and coupon bonds. fficeffice" />

Q1. Which of the following is least likely a characteristic of bond forward contracts?

A)   Prices are stated as yield to maturity, including accrued interest.

B)   Contracts can be written on bonds with embedded options.

C)   Contracts must settle before the bond matures.

Correct answer is A)

Bond forward contracts are typically stated as a yield to maturity exclusive of accrued interest. Both of the other statements are characteristics of bond forward contracts.

Q2. The settlement price of a deliverable forward contract at 6% on a $1 million 90-day Treasury bill would be:

A)   determined by the market rates at expiration.

B)   $985,000.

C)   $940,000.

Correct answer is B)

Treasury bills are quoted as a discount from face value, which is annualized based on a 360 day year. (90/360) × 6% = 1.5%, so the contract price of the $1 million bill is [1 ? 0.015] × 1,000,000 = $985,000.

Q3. The price of a 90-day forward contract on a 90-day Treasury bill will be:

A)   above the current price of a 90-day T-bill.

B)   above the current price of a 180-day T-bill.

C)   either above or below the current price of a 180-day T-bill.

Correct answer is B)

Since purchasing a 180-day T-bill today will result in a 90-day T-bill 90 days from now, the forward price must be higher than the current price of a 180-day T-bill. As long as interest rates are positive, no one would agree to sell a 180-day bill at a lower price 90 days later.

Q4. The forward contract price of a coupon-bearing bond is typically quoted as:

A)   a discount to the face value.

B)   the bond dollar-price plus accrued interest as of the settlement date.

C)   a yield to maturity at the settlement date.

Correct answer is C)        

The contract price for a coupon-bearing bond is typically quoted as its yield to maturity. The accrued interest is (customarily) added to the price on a deliverable contract, but not included in the stated price quote.

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