1. Suppose the September CBOT Treasury bond futures contract has a quoted price

Question

1. Suppose the September CBOT Treasury bond futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

2. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80-07. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)
a. -$78.00
b. -$82.00
c. -$86.00
d. -$90.00
e. -$95.00

3. A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?
a. Buying inverse floaters.
b. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
c. Purchase principal only (PO) strips that decline in value whenever interest rates rise.
d. Enter into a short hedge where the bank agrees to sell interest rate futures.
e. Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.

Explanation / Answer

ans.1 = 7.00% Quote: 89’09 0.89 0.09 N: 40 PV = (0.89+0.09/32) × $1,000 = -$892.81 FV = $1,000 PMT = $30 I/YR = 3.5% ans 2. Coupon rate on bond underlying futures contract = 6% N= 40 = 20 years x 2 (as coupon is paid semiannually) PV= -$802.1875 The price of a bond with a face value of $1000; negative sign because...

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