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Basic Question 3 of 18
Which of these coupon structures will provide increasing coupon payments in the event that the slope of the term structure becomes steeper (i.e., long-term rates increase relative to short-term rates)?
r = six-month Treasury bill rate
g = six-month LIBOR rate
B. 3% + Maximum [(3.5 x (R-r)) or 0]
C. Maximum [(7.25 x (r-g)) or 0]
D. Maximum [(18% - 2.5R) or 0]
R = 10-year U.S. Treasury note rate
r = six-month Treasury bill rate
g = six-month LIBOR rate
A. 5% + Maximum [(0.60 x (15% - r)) or 0]
B. 3% + Maximum [(3.5 x (R-r)) or 0]
C. Maximum [(7.25 x (r-g)) or 0]
D. Maximum [(18% - 2.5R) or 0]
User Contributed Comments 7
| User | Comment |
|---|---|
| SSPatel | Which interest rate structure pays more if long-term interest rates increase compared to short-term rates. In answer choice B, the (R-r) would increase yielding a higher rate. |
| ljamieson | B is the only one that is a function of both a short rate and long rate |
| magicchip | nothing but B mentions long term rates, therefore B |
| Donnaiola | long term rates are mentioned in D as well. However, in that formula, rising long term rates will have an inverse effect on the coupon. |
| Oarona | Good observations Donnaiola |
| slipleft | The mention of long term rates matters not. If B did not have the 3.5 multiplier, then B would be only be true under certain conditions. Best bet, insert rates consistent with an upward sloping yield curve for r, g and R, then solve each equation. |
| philerup | Just read the question, when it says relative to something, there has to be at least two variables. |
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Learning Outcome Statements
describe common cash flow structures of fixed-income instruments
CFA® 2024 Level I Curriculum, Volume 4, Module 2.