Chapter 21 Interest Rate Options

1) Which of the following is true?

A) A callable bond allows the lender to ask for the principal to be repaid early

B) A callable bond allows the borrower to repay the principal early

C) A callable bond is a bond with an embedded stock option

D) None of the above

2) Which of the following is true?

A) A puttable bond allows the lender to ask for the principal to be repaid early

B) A puttable bond allows the borrower to repay the principal early

C) A puttable bond is a bond with an embedded stock option

D) None of the above

3) Which of the following is true?

A) A swaption that gives the holder the right to pay fixed is equivalent to a call option on a bond

B) A swaption that gives the holder the right to pay fixed is equivalent to a put option on a bond

C) A swaption that gives the holder the right to pay fixed is equivalent to a put option on one bond combined with a call option on another bond

D) None of the above

4) In a cap with quarterly reset dates, the cap rate is 3.5% per annum and the notional principal is $1 million. Suppose that the LIBOR rate is 4.0% per annum for a particular 3-month period. What is the approximate payoff at the end of the 3 months?

A) $10,000

B) $5,000

C) $2,500

D) $1,250

5) In a floor with semiannual reset dates, the floor rate is 3.5% per annum and the notional principal is $1 million. Suppose that the LIBOR rate is 3% per annum for a particular 6-month period. What is the approximate payoff at the end of the 6 months?

A) $10,000

B) $5,000

C) $2,500

D) $1,250

6) A floating-rate borrower wants to use a collar as a hedge. Which of the following is appropriate?

A) Buy a cap and sell a floor

B) Buy a cap and buy a floor

C) Sell a cap and sell a floor

D) Sell a cap and buy a floor

7) A floating-rate lender wants to use a collar as a hedge. Which of the following is appropriate?

A) Buy a cap and sell a floor

B) Buy a cap and buy a floor

C) Sell a cap and sell a floor

D) Sell a cap and buy a floor