土豆妮

Which of the following is closest to the annualized yield volatility (250 trading days per year) if the daily yield volatility is equal to 0.6754%?

A) 9.73%.

B) 168.85%.

C) 10.68%.

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Annualized yield volatility = σ ×

where:
σ = the daily yield volatility

So, annualized yield volatility = (0.6754%) = 10.68%.

土豆妮

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

A) 0.0577.

B) 0.0349.

C) 0.0000.

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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.

土豆妮

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

A) The appropriate time horizon.

B) The liquidity of the underlying instrument.

C) The shape of the yield curve.

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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.