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The swap rate curve is typically based on which interest rate?
A)
The Fed Funds rate.
B)
Treasury bill and bond rates.
C)
LIBOR.



The interest rate paid on negotiable CDs by banks in London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. The Fed Funds rate is the rate paid on interbank loans within the U.S. Treasury bill and bond rates are used for determining the yield curve, but not for the swap rate curve.

TOP

To construct a theoretical spot-rate curve using Treasury securities, the class of securities that provides the most accurate prices but has the disadvantage of large maturity gaps is:
A)
strips.
B)
on-the-run securities.
C)
off-the-run securities.



On-the-run securities have the greatest trading volume; therefore, they should be the most accurately priced issues. The Treasury only issues bonds of specified maturities, however, and large gaps exist between the maturities.

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Which of the following Treasury issues is typically NOT a candidate used to construct the theoretical spot rate curve?
A)
Treasury principal strips.
B)
Treasury coupon strips.
C)
All Treasury coupon securities and bills.



The following Treasury securities can be used to construct a default-free theoretical spot rate curve:1)
On-the-Run Treasury - the newest Treasury issues of a given maturity:

  • T-Bills:
    zero-coupon securities with 3-month, 6-month, and 1-year maturities.

  • Treasury Notes:
    coupon instruments with 2-year, 5-year, and 10-year maturities.
  • Treasury Bonds:
    coupon instruments with 30-year maturities.
2)   On-the-run Treasury issues and selected off-the-run Treasury issues.
3)   All Treasury coupon securities and Bills.
4)   Treasury coupon strips.

TOP

Which type of yield shift change explains the largest percentage of variation in total realized bond returns?
A)
Slope changes.
B)
Curvature changes.
C)
Rate changes.



Changes in the level of rates make the greatest contribution, explaining almost 90% of the observed variation in total returns for all maturity levels.

TOP

Changes in all of the following have been identified as one of the three factors that explain historical Treasury returns EXCEPT the:
A)
curvature of the yield curve.
B)
level of interest rates.
C)
default risk premium.



Default risk is not relevant for Treasury securities. Research has identified the curvature of the yield curve, level of interest rates, and the slope of the yield curve as explaining over 95% of the changes in Treasury returns.

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Research studies have identified three factors that explain historical Treasury returns. Which of the following is the factor with the most explanatory power? Changes in the:
A)
slope of the yield curve.
B)
level of interest rates.
C)
default risk premium.



Default risk is not relevant for Treasury securities. Changes in the level of interest rates accounts for almost 90% of the observed variation in total returns.

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Change in which of the following is NOT a factor that has been observed to drive Treasury returns?
A)
The coupon of Treasury securities.
B)
The level of interest rates.
C)
The curvature of the yield curve.



The coupon for Treasury securities is constant.

TOP

Changes in which of the following factors has been observed to be the most important driving force for Treasury returns?
A)
Level of interest rates.
B)
Slope of the yield curve.
C)
Coupon of Treasury securities.



In regressions, changes in the level of the interest rate have been shown to explain about 90% of the Treasury return variance.

TOP

Which of the following statements about yield curves is least accurate?
A)
A positive butterfly means that the yield curve has become less curved.
B)
Twists and butterfly shifts are examples of nonparallel yield curve shifts.
C)
The slope of the yield curve changes slightly following a parallel shift.



The slope of the yield curve never changes following a parallel shift.

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Which of the following statements about yield curves is most likely accurate?
A)
A yield curve gets steeper when spreads widen.
B)
A negative butterfly means that the yield curve has become less curved.
C)
A twist refers to changes to the degree to which the yield curve is humped.



A twist refers to yield curve changes when the slope becomes either flatter or steeper. A negative butterfly means that the yield curve has become more curved.

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