The compounding frequency for an interest rate defines
A. The frequency with which interest is paid
B. A unit of measurement for the interest rate
C. The relationship between the annual interest rate and the monthly interest rate
D. None of the above
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An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding?
A. 5.79%
B. 6.21%
C. 5.83%
D. 6.18%
An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding?
A. 5.06%
B. 5.03%
C. 4.97%
D. 4.94%
The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded.
A. 6.75%
B. 7.0%
C. 7.25%
D. 7.5%
Under liquidity preference theory, which of the following is always true?
A. The forward rate is higher than the spot rate when both have the same maturity.
B. Forward rates are unbiased predictors of expected future spot rates.
C. The spot rate for a certain maturity is higher than the par yield for that maturity.
D. Forward rates are higher than expected future spot rates.
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