Mechanic

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.

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

Mechanic

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.

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The coupon for Treasury securities is constant.

Mechanic

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.

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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.

Mechanic

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.

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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.

Mechanic

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.

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

Mechanic

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.

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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.

Mechanic

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.

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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.

Mechanic

The swap rate curve is typically based on which interest rate?

A) The Fed Funds rate.

B) Treasury bill and bond rates.

C) LIBOR.

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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.

Mechanic

Which of the following is NOT a reason why market participants prefer the swap rate curve over a government bond yield curve? The swap market:

A) reflects sovereign credit risk.

B) it is not affected by technical factors.

C) is free of government regulation.

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Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. These rates are determined by market participants and are not regulated by governments. Swap rate curves are not affected by technical market factors that affect the yields on government bonds. The swap rate curve is also not subject to sovereign credit risk (potential government default on debt) that is unique to each country.

Mechanic

Compared to a yield curve based on government bonds, swap rate curves are:

A) more comparable across countries and have a greater number of yields at various maturities.

B) less comparable across countries and have a greater number of yields at various maturities.

C) more comparable across countries and have a smaller number of yields at various maturities.

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Swap rate curves are typically determined by dollar denominated borrowing based on LIBOR. These rates are determined by market participants and are not regulated by governments. Swap rate curves are not affected by technical market factors that affect the yields on government bonds. Swap rate curves are also not subject to sovereign credit risk (potential government default on debt) that is unique to government debt in each country. Thus swap rate curves are more comparable across countries because they reflect similar levels of credit risk. There is also a wider variety of maturities available for swap rate curves, relative to a yield curve based on US Treasury securities, which has only four on-the-run maturities of two years or more. Swap rate curves typically have 11 quotes for maturities between 2 and 30 years.