Question #13

of 77 The fixed-rate on a semiannual 2-year interest rate swap is closest to the: A) coupon rate on a 2-year par bond with the same credit risk as the reference rate. B) coupon rate on a 2-year par bond with the same credit risk as the fixed-rate payer. C) current 180-day T-bill rate. The Isle of Nefer is a developing country with its stock and futures markets enjoying record trading volumes due to the influx of foreign funds. You are looking to invest in the stock and futures markets in the Isle of Nefer. The representative stock market index, Nefer Industrial Index (NII), is currently priced at 8,765 and the one year NII future contract is currently trading at 8,920. You have experience in using forward contracts but not futures. You discuss the possibility of investing in the Isle of Nefer using futures contract with your supervisor, Peter Filler, and he makes the following comments. Comment 1: "A futures contract will have positive value after marking to market if the future price is up on that day." Comment 2: "Given a quoted clean bond price of the CTD, when looking at a bond future the full price of the bond must be used which equals the clean price of the bond plus accrued interest. The futures price can then be calculated as: QFP = {(full price) × (1 + Rf)T + AIT – FVC)(1 / CF) Where AIT = accrued interest at futures maturity, Rf = risk-free rate, FVC = future value of coupon and CF = conversion factor Peter Filler also suggests that you invest in Treasury bond futures. Exhibit 1 contains the relevant information. Exhibit 1 Price of underlying deliverable 16 year 5% Treasury bond (just paid coupon) $1,030 Expiration of Treasury bond futures contract 0.7 year Conversion factor 1.08 Risk free rate 3.0 percent