Which of the following is TRUE about interest rates? A LIBOR rate is the only risk-free...

Which of the following is TRUE about interest rates?

A LIBOR rate is the only risk-free rate proxy that is used extensively by derivatives traders after the credit crisis that started in 2007.

Par yield is the coupon rate that causes the bond price to equal to is market value.

Bond yield is the single discount rate that gives the value of the bond equal to its par (or principal) value.

Treasury rate is considered to be artificially low and as a result Treasury rates are not used by derivatives dealers as a proxy for the risk-free rate.

Expert Solution

(1) A LIBOR rate is the only risk-free rate proxy that is used extensively by derivatives traders after the credit crisis that started in 2007.

FALSE, its not the only,SFR and treasury yield are examples of rf rate proxy.

(2) Par yield is the coupon rate that causes the bond price to equal to is market value.

FALSE. par yield is the coupon rate that causes the bond price equal to par value not market value

(3) Bond yield is the single discount rate that gives the value of the bond equal to its par (or principal) value.

FALSE, bond yield is the rate used to discount CF's to arrive at intrinsic value i.e what the price of the bond should be.

(4) Treasury rate is considered to be artificially low and as a result Treasury rates are not used by derivatives dealers as a proxy for the risk-free rate.

TRUE.

jeff jeffy answered 2 years ago

Which of the following statement regarding interest rate risk is true? A. Interest rate risk is...

Which of the following statement regarding interest rate risk is true? A. Interest rate risk is a positive relationship between bond price and interest rate. B. The longer the maturity, the lower the interest rate risk. C. The higher the coupon rate, the higher the interest rate risk. D. The higher the coupon rate, the lower the interest rate risk

Q1. Evaluate whether these rates (LIBOR and OIS) are risk-free?

Which of the following statements is true about EVE (economic value of equity) interest rate risk...

Which of the following statements is true about EVE (economic value of equity) interest rate risk models? They express risk in terms of cumulative gap. They only reflect risk over a short horizon, such as a year. They express interest rate risk in terms of potential change in the theoretical value of the bank. Which of the following statements is true regarding capital requirements for banks? Lower capital levels reduce the risk of bank failures. Higher capital levels reduce risk...

INTEREST RATES= INFLATION PREMIUM + Compensation for risk free rate ( T Bill Rate ) of...

INTEREST RATES= INFLATION PREMIUM + Compensation for risk free rate ( T Bill Rate ) of return + specific risk premium compensation ( Default Risk, Liquidity Risk, Maturity Risk, Opportunity risk, etc). compare and contrast the various methods used by banks to assess interest rate risk to their net interest rate margin?

Explain the following money market rates Prime rate Federal fund rate Libor Explain Capital market interest...

Explain the following money market rates Prime rate Federal fund rate Libor Explain Capital market interest rate 1-10-years treasury rate 2- jumbo mortgages Explain the mortgage backed securities Explain the following indices Dow Jones Industrial Average S&P 500 Nasdaq Composite Name another two stock market indices

What factors affect nominal interest rates? In other words, what is the risk free rate and...

What factors affect nominal interest rates? In other words, what is the risk free rate and what factors determine the risk premium? Explain them.

4. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain...

4. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next two years and 5% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security's maturity. The liquidity premium (LP) on all National Transmissions Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums...

Compare LIBOR and OIS as benchmark rates that could be used in valuing interest rate swaps.

Which of the following equations is correct? A. Discount rate = Risk-free rate – Risk premium...

Which of the following equations is correct? A. Discount rate = Risk-free rate – Risk premium B. Discount rate = Risk-free rate ? Risk premium C. Discount rate = Risk-free rate ÷ Risk premium D. Discount rate = Risk-free rate + Risk premium

Problem 4-18 Determinants of Interest Rates The real risk-free rate is 4%. Inflation is expected to...

Problem 4-18 Determinants of Interest Rates The real risk-free rate is 4%. Inflation is expected to be 2% this year, 3% next year, and then 5.5% thereafter. The maturity risk premium is estimated to be 0.0007 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Round your answer to two decimal places. _____%

Question