Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 20 points for this homework assignment.

- Which of the following statements about interest rate and reinvestment rate risk is CORRECT?
- Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.
- Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.
- Interest rate price risk can be eliminated by holding zero coupon bonds.
- Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
- Interest rate risk can never be reduced.
- 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?
- Buying inverse floaters.
- 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.
- Purchase principal only (PO) strips that decline in value whenever interest rates rise.
- Enter into a short hedge where the bank agrees to sell interest rate futures.
- Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
- 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?
- 6.32%
- 6.65%
- 7.00%
- 7.35%
- 7.72%
- Suppose the December CBOT Treasury bond futures contract has a quoted price of 80-07. What is the implied annual interest rate inherent in the futures contract?
- 6.86%
- 7.22%
- 7.60%
- 8.00%
- 8.40%
- 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.)
- -$78.00
- -$82.00
- -$86.00
- -$90.00
- -$95.00