When Interest Rates Fall,a Bank That Perfectly Hedges Its Portfolio

question 70

Multiple Choice

When interest rates fall,a bank that perfectly hedges its portfolio of Treasury securities in the futures market

• A)suffers a loss.
• B)experiences a gain.
• C)has no change in its income.
• D)may either gain,lose or see no change in its income.

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Definitions:

Nominal Yield

The nominal yield of a bond or other fixed-income investment is the interest rate stated on the financial instrument, which does not account for inflation or the compounding of interest.

Semiannual Interest Payments

These are interest payments made twice a year on a financial instrument, such as a bond.

Coupon Rate

The annual interest rate paid by a bond's issuer to its bondholders, usually expressed as a percentage of the face value.

Face Value

The nominal or dollar value printed on a stock, bond, or other financial instrument, representing its legal value.