You Borrow Money at Libor with a Floating-Rate Note for One

question 21

Multiple Choice

You borrow money at Libor with a floating-rate note for one year with two semi-annual payments.What position do you need to add to this note to fix the cost of borrowing for the entire year?

• A)Sell a \(6 \times 12\)
• FRa)
• B)Buy a \(6 \times 12\)
• FRA)
• C)Buy a one-year zero-coupon bond and short a 1.5-year zero-coupon bond.
• D)Buy a six-month zero-coupon bond and short a one-year zero-coupon bond.

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Definitions:

Popular Belief

A widely held opinion or conviction among a large group of people, regardless of whether it is based on fact or myth.

Slippery Slope Fallacy

A logical fallacy in which a relatively small first step leads to a chain of related events culminating in some significant effect, much like sliding down a slippery slope.

Gambler's Fallacy

A logical fallacy in which one assumes that future probabilities are altered by past events, often seen in gambling when assuming a certain outcome is "due".

Sunk Cost Fallacy

The misconception of valuing a project or investment based on the amount of resources already invested, rather than the prospective future returns.