1.Which of the following is a major consideration when the daily yield volatility is annualized?

A)   The appropriate day multiple to use for a year.

B)   The shape of the yield curve.

C)   The liquidity of the underlying instrument.

D)   The appropriate time horizon.

2.Which of the following is the most important consideration in determining the number of observations to use to estimate the yield volatility?

A)   The shape of the yield curve.

B)   The risk aversion of the analyst.

C)   The appropriate time horizon.

D)   The liquidity of the underlying instrument.

3.For a given three-day period, the interest rates are 4.0, 4.1, and 4.0 percent. What is the yield volatility over this period?

A)   0.0349.

B)   0.0577.

C)   0.0471.

D)   0.0000.

4.Yield volatility is a measure of the:

A)   relative daily yield changes over a period.

B)   absolute daily yield changes over a period.

C)   maximum interest-rate change over a given period.

D)   difference in the beginning interest rate and ending interest rate over a period.

5.Suppose that the sample mean of 25 daily yield changes is 0.08 percent, and the sum of the squared deviations from the mean is 9.6464. Which of the following is the closest to the daily yield volatility?

A)   0.3859%.

B)   0.6340%.

C)   0.4019%.

D)   0.6212%.

6.What is the annualized yield volatility if the daily yield volatility is equal to 0.6754 percent?

A)   9.73%.

B)   23.54%.

C)   168.85%.

D)   10.68%.

1.Which of the following is a major consideration when the daily yield volatility is annualized?

A)   The appropriate day multiple to use for a year.

B)   The shape of the yield curve.

C)   The liquidity of the underlying instrument.

D)   The appropriate time horizon.

The correct answer was A)

Typically, the number of trading days per year is used, i.e., 250 days.

2.Which of the following is the most important consideration in determining the number of observations to use to estimate the yield volatility?

A)   The shape of the yield curve.

B)   The risk aversion of the analyst.

C)   The appropriate time horizon.

D)   The liquidity of the underlying instrument.

The correct answer was C)

The appropriate number of days depends on the investment horizon of the user of the volatility measurement, e.g., day traders versus pension fund managers.

3.For a given three-day period, the interest rates are 4.0, 4.1, and 4.0 percent. What is the yield volatility over this period?

A)   0.0349.

B)   0.0577.

C)   0.0471.

D)   0.0000.

The correct answer was A)

The yield volatility is the standard deviation of the natural logarithms of the two ratios (4.1/4.0) and (4.0/4.1) which are 0.0247 and –0.0247 respectively. Since the mean of these two numbers is zero, the standard deviation is simply {[(0.0247)² +(-0.0247)²]/(2-1)}^0.5=0.0349.

4.Yield volatility is a measure of the:

A)   relative daily yield changes over a period.

B)   absolute daily yield changes over a period.

C)   maximum interest-rate change over a given period.

D)   difference in the beginning interest rate and ending interest rate over a period.

The correct answer was A)

Yield volatility measures the relative daily yield changes over some period. To see why this might be important, note that an interest rate series could begin and end at the same point but have very large changes during the period. Such information would likely be of value to the bond analyst.

5.Suppose that the sample mean of 25 daily yield changes is 0.08 percent, and the sum of the squared deviations from the mean is 9.6464. Which of the following is the closest to the daily yield volatility?

A)   0.3859%.

B)   0.6340%.

C)   0.4019%.

D)   0.6212%.

The correct answer was B)

Daily yield volatility is the standard deviation of the daily yield changes. The variance is obtained by dividing the sum of the squared deviations by the number of observations minus one. Therefore, we have:

Variance = 9.6464/(25 – 1) = 0.4019

Standard deviation = yield volatility = (0.4019)^½ = 0.6340%

6.What is the annualized yield volatility if the daily yield volatility is equal to 0.6754 percent?

A)   9.73%.

B)   23.54%.

C)   168.85%.

D)   10.68%.

The correct answer was D)

Annualized yield volatility = σ x √(# of trading days in a year)

Where σ = the daily yield volatility.

So,

Annualized yield volatility = 0.6754% √(250) = 10.68%