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Hull: Fundamentals of Futures and Options Markets, Ninth Edition
Chapter 4: Interest Rates
Multiple Choice Test Bank
1. The compounding frequency for an interest rate defines
A. The frequency with which interest is paid
B. A unit of measurement for the interest rate
C. The relationship between the annual interest rate and the monthly interest rate
D. None of the above
2. An interest rate is 6% per annum with annual compounding. What is the equivalent rate with
continuous compounding?
A. 5.79%
B. 6.21%
C. 5.83%
D. 6.18%
3. An interest rate is 5% per annum with continuous compounding. What is the equivalent rate
with semiannual compounding?
A. 5.06%
B. 5.03%
C. 4.97%
D. 4.94%
4. An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate
with quarterly compounding?
A. 11.83%
B. 11.66%
C. 11.77%
D. 11.92%
14. Which of following describes forward rates?
A. Interest rates implied by current zero rates for future periods of time
B. Interest rate earned on an investment that starts today and last for n-years in the future
without coupons
C. The coupon rate that causes a bond price to equal its par (or principal) value
D. A single discount rate that gives the value of a bond equal to its market price when
applied to all cash flows
15. Given a choice between 5-year and 1-year instruments most people would choose 5-year
instruments when borrowing and 1-year instruments when lending. Which of the following is a
theory consistent with this observation?
A. Expectations theory
B. Market segmentation theory
C. Liquidity preference theory
D. Maturity preference theory
16. A repo rate is
A. An uncollateralized rate
B. A rate where the credit risk is relative high
C. The rate implicit in a transaction where securities are sold and bought back at a higher
price
D. None of the above
17. Bootstrapping involves
A. Calculating the yield on a bond
B. Working from short maturity instruments to longer maturity instruments determining
zero rates at each step
C. Working from long maturity instruments to shorter maturity instruments determining
zero rates at each step
D. The calculation of par yields
