BFC3341 MST – Practice Questions
Semester 1, 2024
Question 1: Please specify the difference between the fed funds rate and discount rate.
Question 2: Large financial institutions need long-term financing to support their balance sheet assets. However, they practice short-term financing through commercial papers most of the time in the real world. During the onset of the Covid-19 Pandemic, because the commercial paper market had been disrupted, large financial institutions borrowed a lot of 5-year corporate bonds instead. Please explain the following questions. Why do large financial institutions prefer commercial papers even if they need long-term financing in normal times? What are the disadvantages of borrowing 5-year bonds and issuing commercial papers, respectively?
Question 3:
Reserve Bank of Australia release the recent prices and yields-to-maturity on zero coupon government bonds:
|
Maturity
|
Price
|
Yield-to-Maturity
|
|
1 year
|
98.63
|
2.371%
|
|
2 years
|
95.49
|
2.640%
|
|
3 years
|
92.87
|
2.834%
|
|
4 years
|
91.06
|
3.027%
|
The prices are per 100 of par value. The yields-to-maturity are stated on a semi-annual bond basis.
(1) Compute the “3y1y” implied forward rates.
(2) Compute the effective annual rate for the “3y1y” implied forward rates.
(3) What is the meaning of this implied forward rate for investors? Explain how the magnitude of this rate affects the investment decision over a four-year horizon?
Question 4: a repo contract has been signed between an Australia Life Insurance company (ALI) and the commonwealth bank (CBA). In the deal, the collateral is 5% (annual coupon rate, semiannual payment) Australia Treasury notes with a clean price of 108. The face value is A$ 10,000,000. Treasury day count is (160 actual)/(365 actual). There are 80 days for accrued interest. The repo term is 31 days, and the repo rate is 0.6%. The Repo rate count is actual/360. Please calculate repo purchase price (ALI buys from CBA), repo interest rate, and repo repurchase price (CBA buys from ALI).