IIBF CTP Practice Questions: Treasury Maths

Forex Quotes and Value Dates

Module IV. Read the quote before you calculate anything.

1. Forex Dealings

   1. A bank quotes USD 1 = Rs 48.1525/1650. At what rate does the bank buy dollars?

   1. A.Rs 48.1525
   2. B.Rs 0.0125
   3. C.Rs 48.1588
   4. D.Rs 48.1650
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   Answer: A. Rs 48.1525

   In a two-way direct quote the first figure is the buying rate and the second the selling rate. 48.1650 minus 48.1525 = Rs 0.0125 is the spread, the bank's gross margin, not a rate. Rs 48.1588 is the mid rate.

2. Forex Dealings

   2. A Singapore quote reads USD 1 = CHF 1.5425/5440. Which rate is the bank's dollar buying rate?

   1. A.CHF 3.0865
   2. B.CHF 1.5425
   3. C.CHF 1.5432
   4. D.CHF 1.5440
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   Answer: B. CHF 1.5425

   The quote prices one dollar in francs, so the bank buys dollars at the lower figure (gives fewer francs) and sells at the higher one. CHF 1.5432 is roughly the mid rate and CHF 3.0865 is the two figures added together.

3. Forex Dealings

   3. When forward margin points are quoted in ascending order, such as 50/60, the forward currency is said to be at:

   1. A.A cross rate
   2. B.A discount, to be subtracted from spot
   3. C.A premium, to be added to spot
   4. D.Par with spot
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   Answer: C. A premium, to be added to spot

   Ascending points mean a premium: add them to spot on both sides. With spot 48.1525/1650, the outright is 48.1575/1710. Descending points would mean a discount, to be subtracted.

4. Forex Dealings

   4. A deal is struck on Friday 07.02.2014, and Saturday and Sunday are holidays. What is the TOM value date?

   1. A.Tuesday 11.02.2014
   2. B.Friday 07.02.2014
   3. C.Wednesday 12.02.2014
   4. D.Monday 10.02.2014
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   Answer: D. Monday 10.02.2014

   TOM is the next working day, which is Monday after the weekend. Friday itself is the cash (value today) date, and Tuesday 11.02.2014, the second working day, is the spot date.

Bond Pricing, Accrued Interest and Duration

Module III. These test the steps inside every bond calculation.

1. Investments

   1. A 2-year bond pays semi-annual coupons. How many periods are used in its duration calculation?

   1. A.Four
   2. B.Three
   3. C.Two
   4. D.Six
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   Answer: A. Four

   With semi-annual coupons one period is six months, so a 2-year bond has 2 x 2 = 4 periods. The coupon and the yield are both halved per period too.

2. Investments

   2. Which relationship between dirty price, clean price and accrued interest is correct?

   1. A.Dirty price = Clean price minus Accrued interest
   2. B.Dirty price = Clean price + Accrued interest
   3. C.Clean price = Dirty price + Accrued interest
   4. D.Accrued interest = Clean price + Dirty price
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   Answer: B. Dirty price = Clean price + Accrued interest

   The dirty price includes accrued interest. A bond quoted at a clean ₹99.85 with ₹1.2622 accrued costs the buyer ₹101.1122 per ₹100.

3. Investments

   3. For Indian G-Secs, accrued interest covers the period from the last coupon date up to which day?

   1. A.The next coupon date
   2. B.The trade date plus one month
   3. C.The day before the settlement date
   4. D.The maturity date
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   Answer: C. The day before the settlement date

   Interest accrues from the last coupon date up to the day before settlement, counted on the 30/360 basis. The buyer pays this on top of the clean price.

4. Investments

   4. Who is entitled to the coupon for the period before settlement, which the buyer pays for as accrued interest?

   1. A.The buyer
   2. B.The depository
   3. C.The issuer
   4. D.The seller
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   Answer: D. The seller

   The seller held the bond during that broken period but will not receive the next coupon, so the buyer compensates the seller through accrued interest.

5. Investments

   5. Modified duration approximates which of the following?

   1. A.Percentage price change for a 1% change in yield
   2. B.Change in duration for a change in yield
   3. C.Weighted average life of principal
   4. D.Rupee price change for a 1 bp change in yield
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   Answer: A. Percentage price change for a 1% change in yield

   A modified duration of 4.15 means the price moves about 4.15% for a 1% change in yield. The rupee change for 1 basis point is PV01, and the change in duration as yields move relates to convexity.

6. Investments

   6. Which kind of bond has a duration exactly equal to its maturity?

   1. A.High coupon bond
   2. B.Zero coupon bond
   3. C.Floating rate bond
   4. D.Amortising bond
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   Answer: B. Zero coupon bond

   A zero coupon bond has a single cash flow at maturity, so all the weight sits there. Any bond paying coupons has a duration shorter than its maturity.

Time Value of Money, Day Count and Swaps

Modules V and VII. The formulas behind the sums.

1. Time Value of Money

   1. The expression (1+i)^-n, used to bring a future amount back to the present, is called the ________.

   1. A.capitalisation rate
   2. B.accumulation factor
   3. C.discount factor
   4. D.annuity factor
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   Answer: C. discount factor

   (1+i)^-n is the discount factor. Its reciprocal, (1+i)^n, is the accumulation factor. At 8% for 3 years the discount factor is 1 / 1.08³ = 0.7938.

2. Time Value of Money

   2. Which formula gives the future value of a present sum PV at rate i per period for n periods?

   1. A.PV x i x n
   2. B.PV/(1+i)^n
   3. C.PV x (1+i) x n
   4. D.PV(1+i)^n
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   Answer: D. PV(1+i)^n

   Future value is PV times the accumulation factor (1+i)^n. Dividing by it gives present value instead, and PV x i x n is simple interest only.

3. Time Value of Money

   3. Which bond day count convention divides actual days in the period by actual days in the year?

   1. A.Actual/Actual
   2. B.30/360
   3. C.Actual/360
   4. D.30E+/360
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   Answer: A. Actual/Actual

   Actual/Actual uses actual days in the period over actual days in the year (365 or 366). Indian G-Secs use 30/360 instead, and the Indian money market uses Actual/365.

4. Derivatives

   4. At initiation of a plain vanilla interest rate swap, its value to either party is ________.

   1. A.positive for the floating-rate payer
   2. B.zero
   3. C.equal to the notional amount
   4. D.positive for the fixed-rate payer
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   Answer: B. zero

   The fixed rate is set so that the present values of the two legs are equal, so the swap starts at zero value. It becomes positive for one party and negative for the other only as rates move.

Five Numericals, Worked

Illustrative figures, each in the form the exam asks. Formula first, then the working.

Where Candidates Lose Marks on Numericals

• check_circleUsing face value instead of price in the T-Bill yield. Dividing by 100 gives the discount rate (7.02% for a ₹98.25 bill), not the yield (7.14%).
• check_circleForgetting to halve the coupon and the yield for semi-annual G-Secs.
• check_circleMixing day counts: 30/360 for G-Sec accrued interest, actual/365 for T-Bills, repo and call money.
• check_circleApplying forward points the wrong way. Read ascending or descending first.
• check_circleRaising to powers on a basic calculator. Multiply or divide by (1 + i) repeatedly instead.

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