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TMA Treasury Markets Certificate study materials
TMA Treasury Markets Certificate study resources

TMA Treasury Markets Certificate practice questions

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Question 1Treasury Markets

A UK corporate treasurer holds a sterling surplus and wants to earn interest while retaining the option to withdraw funds on any business day without penalty. Which instrument best matches this requirement?

  1. A 5-year gilt purchased at issue
  2. An overnight money market deposit placed with a bank Correct answer.
  3. A 12-month fixed-rate sterling certificate of deposit
  4. A forward rate agreement fixing a future borrowing cost

Explanation

Overnight deposits are repayable the next business day, so they combine daily liquidity with interest earned on the surplus. Longer-dated instruments such as term CDs and gilts either lock funds or expose the holder to price risk on early sale. An FRA is a hedging contract that fixes an interest rate rather than a place to lodge cash.

Question 2Treasury Markets

In the treasury market, what does a bid-offer spread quoted by a dealer represent?

  1. The gap between the central bank policy rate and the market rate
  2. The margin between a bond's coupon and its yield to maturity
  3. The credit rating differential between two issuers
  4. The difference between the rate at which the dealer buys and sells an instrument Correct answer.

Explanation

Dealers quote two-way prices: the bid at which they will buy from a client and the offer at which they will sell. The spread between the two is the dealer's compensation for making a market and bearing inventory risk. It is not a credit, policy or coupon measure.

Question 3Treasury Markets

A treasurer expects to receive a large cash inflow in three months and wishes to lock in the deposit rate obtainable at that time. Which instrument is designed for this purpose?

  1. A short sterling future sold today
  2. A forward rate agreement referencing a three-month deposit Correct answer.
  3. A repurchase agreement collateralised by gilts
  4. A spot foreign exchange swap

Explanation

An FRA fixes an interest rate for a future deposit or borrowing period, settling the difference against the reference rate at the start of that period. It therefore locks the rate for a future cash placement without moving principal today. Futures hedge rate exposure but are margined and standardised, while FX swaps and repos address currency and secured funding needs.

Question 4Treasury Markets

A bank's treasury desk funds a 90-day asset with a 30-day deposit and plans to roll the deposit twice. What risk is the desk primarily running?

  1. Credit spread risk on the asset
  2. Option risk embedded in the asset
  3. Settlement risk on the deposit
  4. Refinancing or rollover risk Correct answer.

Explanation

Mismatching the maturity of funding against the asset creates exposure to the rate and availability of replacement funding at each roll date. If wholesale markets tighten, the desk may have to pay more or fail to roll. Credit spread, settlement and embedded optionality are separate risks not created by this tenor mismatch.

Question 5Treasury Markets

Which statement correctly describes the settlement convention for a standard spot foreign exchange transaction between two major currencies?

  1. Value date is the same business day as the trade date
  2. Value date is normally two business days after the trade date Correct answer.
  3. Value date is fixed at one calendar month after the trade date
  4. Value date is the next business day in the quoting bank's location only

Explanation

Conventionally, spot FX settles two business days after trade, known as T+2, with business days counted in both currency centres. This gives time to confirm and process payments through correspondent networks. Same-day and next-day settlement exist but are described as value today or value tomorrow rather than spot.

Question 6Treasury Markets

A treasurer wants to compare the true cost of two borrowing offers with different day-count conventions. Which measure should be used?

  1. The nominal coupon rate quoted by each lender
  2. The effective annualised cost using the relevant day-count basis Correct answer.
  3. The all-in margin over the reference index only
  4. The arrangement fee expressed in currency terms

Explanation

Quoted rates on different bases, such as actual/365 versus actual/360, are not directly comparable. Converting each to an effective annualised cost on a common basis reveals the true economic cost. Nominal rates, margins alone and fees in isolation each capture only part of the picture.

Question 7Treasury Markets

In a repurchase agreement, the difference between the purchase price and the repurchase price of the collateral is best described as which of the following?

  1. The haircut applied to the collateral
  2. The variation margin called by the clearing house
  3. The repo interest earned by the cash lender Correct answer.
  4. The credit rating of the collateral issuer

Explanation

The repo rate is applied to the cash principal over the term, and the repurchase price exceeds the purchase price by that interest amount. The haircut is instead the discount applied to the collateral's market value when sizing the cash lent. Credit rating and variation margin are unrelated concepts in this context.

Question 8Treasury Markets

A government bond is trading at a premium to par. Which relationship between its coupon and its yield to maturity must hold?

  1. The coupon rate is below the yield to maturity
  2. The coupon rate is unrelated to the yield to maturity
  3. The coupon rate exceeds the yield to maturity Correct answer.
  4. The coupon rate equals the yield to maturity

Explanation

When a bond's coupon is higher than the market yield required by investors, the bond's cash flows are worth more than par, so it trades at a premium. Price converges to par as maturity approaches. Coupon equal to yield prices the bond at par, and coupon below yield produces a discount.

Question 9Treasury Markets

A treasurer holds a floating-rate note paying a reference index plus a margin and expects the index to fall sharply. Which action would hedge the resulting income shortfall?

  1. Buy a receiver interest rate swap Correct answer.
  2. Enter a securities lending transaction
  3. Sell a receiver interest rate swap
  4. Buy a payer interest rate swap

Explanation

A receiver swap pays floating and receives fixed, so a fall in the index is offset by the fixed leg received. This protects the coupon income on the floating-rate asset. A payer swap would gain from rising rates instead, and securities lending addresses collateral, not rate exposure.

Question 10Treasury Markets

Which of the following best describes the role of a central counterparty in cleared treasury transactions?

  1. It acts as the issuer of government securities
  2. It guarantees settlement by becoming the buyer to every seller and seller to every buyer Correct answer.
  3. It sets the official policy interest rate for the market
  4. It provides investment advice to participating dealers

Explanation

A central counterparty interposes itself between counterparties through novation, so each side faces the CCP rather than the original counterparty. This mutualises counterparty credit risk and supports multilateral netting. Policy rates, sovereign issuance and advisory services are functions of other institutions.

Question 11Treasury Markets

A treasurer must choose between issuing commercial paper and drawing a committed bank facility for 60 days of working capital. Which consideration most strongly favours the bank facility?

  1. Commercial paper typically offers a lower all-in cost for strong issuers
  2. Commercial paper can be issued in smaller minimum denominations
  3. The bank facility provides committed availability even if market access closes Correct answer.
  4. The bank facility avoids any need for credit rating assessment

Explanation

A committed facility contractually obliges the bank to lend, giving certainty of funding when markets are disrupted. Commercial paper depends on continuous investor demand and can fail to roll in stress. Cost and denomination usually favour commercial paper for highly rated issuers, and facilities still involve credit assessment.

Question 12Treasury Markets

An investor buys a bond at a clean price of 98.00 with accrued interest of 1.50. What total consideration does the investor pay per 100 nominal, ignoring fees?

  1. 100.00
  2. 96.50
  3. 99.50 Correct answer.
  4. 98.00

Explanation

The dirty price equals the clean price plus accrued interest, so 98.00 plus 1.50 gives 99.50 per 100 nominal. The clean price excludes interest accrued since the last coupon, while settlement requires the buyer to compensate the seller for it. Subtracting accrued interest would be incorrect.

Question 13Treasury Markets

A treasurer observes that the yield curve is inverted and expects it to normalise through a fall in short-term rates. Which positioning is most consistent with that view?

  1. Entering a pay-fixed one-month forward rate agreement
  2. Receiving fixed in a two-year swap Correct answer.
  3. Paying fixed in a two-year swap
  4. Buying a short-dated put on the long bond

Explanation

Receiving fixed in a swap gains when swap rates fall, which is consistent with an expectation that short rates decline as the curve normalises. Paying fixed would lose in that scenario. Buying a put on the long bond hedges a different part of the curve, and paying fixed in a short FRA gains only if rates rise.

Question 14Treasury Markets

Which of the following is the primary purpose of a cash flow forecast in a corporate treasury function?

  1. To anticipate funding surpluses and deficits so they can be managed in advance Correct answer.
  2. To calculate the fair value of derivative positions at year end
  3. To determine the company's statutory tax liability
  4. To set the coupon on a new bond issue

Explanation

Cash flow forecasting identifies when cash will be received and paid, allowing the treasurer to arrange funding or place surplus cash ahead of time. It supports liquidity management and reduces reliance on expensive emergency borrowing. Tax liability, derivative valuation and coupon setting are separate processes.

Question 15Treasury Markets

A dealer quotes a three-month sterling rate as 5.20/5.25 per cent. A corporate client wishes to borrow at this tenor under a forward rate agreement. Which rate applies?

  1. 5.20 per cent, because the client receives that rate
  2. Whichever rate the client negotiates below the bid
  3. 5.25 per cent, because the client pays the dealer's offer Correct answer.
  4. 5.225 per cent, the midpoint of the two rates

Explanation

The dealer buys at the bid and sells at the offer, and a client wanting to fix a borrowing cost pays the higher offer rate. The bid applies to a client lending or depositing funds. The midpoint is not a dealing rate available to clients.

Question 16Treasury Markets

Which risk is most directly reduced by netting agreements between two derivative counterparties?

  1. Liquidity risk from holding insufficient high-quality assets
  2. Market risk from adverse rate movements
  3. Counterparty credit risk measured on a net rather than gross basis Correct answer.
  4. Operational risk from payment processing errors

Explanation

Close-out netting allows exposures to be combined into a single net amount on default, reducing the credit exposure that would otherwise be measured gross. It does not change the market sensitivity of the trades themselves. Processing errors and asset liquidity are separate risk categories.

Question 17Treasury Markets

A treasurer wants to raise secured short-term funding against a portfolio of high-quality government bonds already owned. Which transaction achieves this while retaining economic exposure to the bonds?

  1. A securities lending transaction with no collateral
  2. A repurchase agreement in which the bonds are sold and bought back at a later date Correct answer.
  3. An outright sale of the bonds with no repurchase obligation
  4. An interest rate swap referencing the bond yield

Explanation

In a repo the bonds are sold and simultaneously repurchased, so the treasurer obtains cash while retaining the economics of ownership apart from the repo interest. An outright sale transfers the bonds permanently. Securities lending without collateral is not standard, and a swap conveys no cash funding.

Question 18Treasury Markets

Which statement about the relationship between bond prices and yields is correct?

  1. Prices and yields move in opposite directions Correct answer.
  2. Prices and yields move in the same direction
  3. Prices are unaffected by changes in yield
  4. Prices rise when yields rise for premium bonds only

Explanation

A bond's price is the present value of its future cash flows discounted at the yield, so a higher yield lowers the present value and vice versa. This inverse relationship applies to all bonds regardless of whether they trade at a premium or discount. The other options contradict this fundamental pricing identity.

Question 19Treasury Markets

A treasurer is hedging a forecast foreign currency receipt and wants protection against an adverse move while retaining upside. Which instrument provides that payoff profile?

  1. A spot sale of the foreign currency today
  2. A purchased put option on the foreign currency Correct answer.
  3. A forward sale of the foreign currency
  4. A sold call option on the foreign currency

Explanation

A purchased put gives the right to sell the currency at a set strike, protecting against depreciation while allowing the holder to benefit if the currency strengthens. A forward locks the rate and removes both downside and upside. A sold call generates premium but obliges delivery at the strike if the currency rises.

Question 20Treasury Markets

A bank treasurer is required to hold a buffer of high-quality liquid assets under liquidity regulation. Which characteristic most matters in selecting those assets?

  1. Long maturity to match the bank's loan book
  2. Issuance by the bank's own group entities
  3. High expected return relative to equities
  4. Ability to be converted into cash quickly with little loss of value Correct answer.

Explanation

The buffer exists to be drawn on in stress, so assets must be liquid and retain value when sold or repoed at short notice. Return and maturity matching are secondary to that purpose. Self-issued assets do not provide independent liquidity.

Question 21Treasury Markets

A treasurer notes that a bond has a modified duration of 4.5. Approximately what price change follows a 10 basis point fall in yield, all else equal?

  1. A fall of about 0.45 per cent
  2. A rise of about 4.5 per cent
  3. No change, because duration measures time not price
  4. A rise of about 0.45 per cent Correct answer.

Explanation

Modified duration approximates the percentage price change for a one percentage point change in yield, so a 0.10 per cent fall gives roughly 4.5 times 0.10, or 0.45 per cent, in the opposite direction. Yields falling means prices rise. Duration is a price sensitivity measure, not merely a time measure.

Question 22Treasury Markets

Which of the following best explains why a treasurer might use a cross-currency swap?

  1. To exchange interest and principal in two currencies and hedge long-dated currency exposure Correct answer.
  2. To settle a spot foreign exchange trade two days after execution
  3. To fix the coupon on a new domestic bond issue
  4. To obtain a short-term secured loan against bonds

Explanation

A cross-currency swap exchanges interest payments, and usually principal, in two currencies over an extended term, allowing a treasurer to match long-dated foreign currency assets or liabilities. Spot FX settlement, repo funding and domestic coupon fixing are different transactions.

Question 23Treasury Markets

A treasurer must decide whether to hedge a highly probable foreign currency payment forecast for next quarter. Which factor most directly supports the decision to hedge?

  1. The currency has recently been stable against the domestic currency
  2. The payment date may move by several weeks
  3. The company's policy requires hedging of exposures above a defined threshold Correct answer.
  4. The forecast amount is small relative to the company's cash flow

Explanation

A board-approved hedging policy gives an objective basis for the decision and should be followed when the exposure meets the stated criteria. Stability of the currency is not a reason to leave exposure unhedged, and uncertainty over timing affects instrument choice rather than the principle. Small size relative to cash flow may justify not hedging.

Question 24Treasury Markets

Which of the following is the correct description of a forward rate agreement's settlement?

  1. The full principal is exchanged on the settlement date
  2. The contract is settled by physical delivery of a bond
  3. The contract requires payment of the full interest amount regardless of rate movements
  4. A cash payment compensates for the difference between the agreed rate and the reference rate Correct answer.

Explanation

An FRA is a cash-settled contract in which the difference between the agreed rate and the reference fixing is discounted and paid at the start of the notional period. No principal changes hands. Physical delivery and unconditional interest payment describe other instruments or are simply incorrect.

Question 25Treasury Markets

A treasurer wants to reduce the interest rate risk on a portfolio of fixed-rate bonds without selling them. Which approach most directly achieves this?

  1. Investing surplus cash in an overnight deposit
  2. Paying fixed in an interest rate swap of matching duration Correct answer.
  3. Receiving fixed in an interest rate swap of matching duration
  4. Buying more fixed-rate bonds of similar duration

Explanation

Paying fixed in a swap creates a position that gains when rates rise, offsetting the loss on the fixed-rate bond portfolio. Buying more fixed-rate bonds would increase the same exposure. Receiving fixed adds to it, and an overnight deposit does not address the portfolio's duration.

Question 26Treasury Markets

A corporate treasurer needs to invest an overnight cash surplus and wants the lowest-risk placement available in the money markets. Which instrument is most appropriate?

  1. A bank certificate of deposit with a six-month maturity
  2. A secured deposit placed under a repurchase agreement against government collateral Correct answer.
  3. A purchase of five-year corporate bonds
  4. An unsecured deposit placed with a single commercial bank

Explanation

An overnight repo against high-quality government collateral is effectively collateralised lending, so the exposure is to the collateral and the counterparty is protected by the margin and daily marking. Unsecured bank deposits carry the full credit risk of the bank, and longer-dated instruments add duration and market risk that an overnight surplus does not require.

Question 27Treasury Markets

A treasurer is quoted a 90-day interest rate of 4.75 per cent on an actual/360 basis. What is the approximate money market interest on a principal of 10,000,000 for that period?

  1. 11,875
  2. 475,000
  3. 47,500
  4. 118,750 Correct answer.

Explanation

Money market interest is principal multiplied by the rate and by the day count fraction, here 90/360 which equals 0.25. So 10,000,000 x 0.0475 x 0.25 gives 118,750. The day-count fraction, not the annual rate alone, determines the cash amount.

Question 28Treasury Markets

Which institution typically acts as lender of last resort and sets the policy interest rate that anchors short-term money market yields?

  1. A central bank Correct answer.
  2. A commercial bank's treasury department
  3. A credit rating agency
  4. A securities settlement system

Explanation

Central banks set the policy rate and provide liquidity support to the banking system, which is why the shortest money market rates trade close to the policy rate. Commercial treasuries, settlement systems and rating agencies influence markets but do not set policy rates.

Question 29Treasury Markets

A treasurer expects a large customer receipt in 30 days and wants to lock in the interest rate on a deposit starting then for three months. Which instrument matches this need?

  1. A spot three-month deposit placed today
  2. A 1x4 forward rate agreement Correct answer.
  3. A three-month interest rate futures contract expiring today
  4. A five-year interest rate swap

Explanation

A 1x4 FRA starts in one month and matures in four months, giving a three-month rate exposure beginning in 30 days, which matches the forecast receipt. It settles in cash against the fixing, so no principal needs to be placed.

Question 30Treasury Markets

Which statement best describes the credit exposure of the fixed-rate payer in a plain vanilla interest rate swap?

  1. Exposure is symmetric with the floating-rate payer at all times
  2. Exposure arises only if the counterparty defaults before the first reset date
  3. Exposure exists only when the swap has a positive mark-to-market value for the payer Correct answer.
  4. Exposure equals the full notional amount throughout the swap's life

Explanation

Swap credit exposure is the cost of replacing the contract, so it exists only when the mark-to-market value is positive to the exposed party. It fluctuates with rates over the life of the trade and is far smaller than the notional principal.

Question 31Treasury Markets

A treasurer wants to know which price a dealer will pay to buy a bond from the client. Which quotation applies?

  1. The mid price
  2. The bid price Correct answer.
  3. The offer price
  4. The last traded price

Explanation

The bid is the price at which the dealer is willing to buy, so a client selling receives the bid. The offer, or ask, is the price at which the dealer sells to the client.

Question 32Treasury Markets

Which day-count convention is most commonly used for sterling money market deposits?

  1. Actual/actual
  2. Actual/365 Correct answer.
  3. 30/360
  4. Actual/360

Explanation

Sterling money market deposits conventionally use actual/365, reflecting the day count over a 365-day year. Actual/360 is typical for US dollar and euro money markets, while 30/360 and actual/actual are more common in bond markets.

Question 33Treasury Markets

A treasurer is reviewing a counterparty's documentation and wants to confirm the legal right to offset obligations in the event of default. Which document primarily governs this?

  1. The ISDA Master Agreement Correct answer.
  2. The trade confirmation
  3. The offering memorandum
  4. The credit support annex

Explanation

The ISDA Master Agreement provides the framework for netting and close-out rights between derivative counterparties. Trade confirmations document individual transactions, and the credit support annex covers collateral arrangements.

Question 34Treasury Markets

A treasurer wants to raise short-term funding by selling securities with an agreement to buy them back the next day at a slightly higher price. Which transaction is this?

  1. A reverse repo
  2. A repo Correct answer.
  3. A securities lending transaction
  4. An outright sale

Explanation

A repo is a sale of securities combined with a commitment to repurchase them later at a higher price, which economically is secured borrowing. A reverse repo is the mirror image, taken by the cash lender.

Question 35Treasury Markets

A treasurer holds a bond with a modified duration of 6.0 and a market value of 20,000,000. Approximately what loss follows a 25 basis point rise in yield?

  1. 12,000
  2. 3,000,000
  3. 300,000
  4. 30,000 Correct answer.

Explanation

The price change is approximately the modified duration multiplied by the yield change and the market value: 6.0 x 0.0025 x 20,000,000 gives 300,000. Because the yield rose, this is a loss of about 300,000, and the option list requires selecting the matching figure carefully.

Question 36Treasury Markets

A treasurer is comparing a bond's yield to maturity with its current yield. For a bond trading at a discount to par, which relationship holds?

  1. The current yield exceeds the yield to maturity
  2. The two measures are unrelated for discount bonds
  3. The current yield equals the yield to maturity
  4. The current yield is less than the yield to maturity Correct answer.

Explanation

For a discount bond the investor also gains the pull to par, so total return exceeds the coupon income relative to price. The yield to maturity therefore exceeds the current yield, which only reflects the annual coupon divided by price.

Question 37Treasury Markets

A treasurer wants to hedge the interest rate risk on a future bond purchase and expects to buy the bond in three months. Which approach best reduces the risk of yields falling before the purchase?

  1. Selling bond futures now and buying them back at purchase
  2. Doing nothing and relying on the passage of time
  3. Selling a payer interest rate swap
  4. Buying bond futures now and closing the position at purchase Correct answer.

Explanation

Buying futures now creates a gain if yields fall and prices rise, offsetting the higher cost of the bond purchased later. The hedge is closed when the bond is bought. Selling futures would protect a future sale, not a future purchase.

Question 38Treasury Markets

Which of the following best explains why a treasurer monitors the spread between government bond yields and the rates at which the corporate can borrow?

  1. The spread measures the coupon reinvestment risk of the bond
  2. The spread shows the day-count convention used by the lender
  3. The spread indicates the settlement cycle of the securities
  4. The spread reflects the credit and liquidity premium charged over the risk-free curve Correct answer.

Explanation

The credit spread compensates lenders for default and liquidity risk relative to the government curve, so tracking it shows how the corporate's funding cost moves independently of the risk-free rate. It is not a measure of reinvestment risk, day count or settlement.

Question 39Treasury Markets

A treasurer has a floating-rate loan paying the reference rate plus 150 basis points and wants to fix the total cost. Which swap should be used?

  1. A payer swap paying fixed and receiving floating Correct answer.
  2. A cross-currency swap
  3. A receiver swap paying fixed and receiving floating
  4. A basis swap exchanging two floating indices

Explanation

The borrower pays floating on the loan and enters a swap paying fixed while receiving floating, so the floating legs offset and the net cost is fixed. A receiver swap would double the floating exposure.

Question 40Treasury Markets

A treasurer must choose between a bank line and a bond issue for a five-year funding need. Which factor most directly favours the bond issue?

  1. A need to diversify funding sources and lock in long-dated fixed-rate funding Correct answer.
  2. A requirement to keep the borrowing private from public disclosure
  3. A desire for a committed facility that can be drawn at short notice
  4. A preference for a facility that can be cancelled annually

Explanation

Bond issuance allows the corporate to access capital markets, diversify away from bank relationships and secure fixed-rate funding for the full tenor. Bank lines are better suited to flexible, short-notice drawings and are often shorter in commitment.

Question 41Treasury Markets

A treasurer receives a foreign currency payment in 90 days and wants to eliminate the currency risk entirely. Which action achieves this?

  1. Entering a forward contract to buy the foreign currency in 90 days
  2. Buying a call option on the foreign currency
  3. Waiting for the spot rate to improve before converting
  4. Entering a forward contract to sell the foreign currency in 90 days Correct answer.

Explanation

A forward sale of the currency the treasurer will receive locks in the exchange rate and removes downside and upside currency risk. An option provides protection but leaves residual risk through the premium and unhedged upside.

Question 42Treasury Markets

Which measure best captures a bank's ability to meet cash outflows over a 30-day stress period under the liquidity coverage framework?

  1. The liquidity coverage ratio Correct answer.
  2. The leverage ratio
  3. The net stable funding ratio
  4. The common equity tier one ratio

Explanation

The liquidity coverage ratio compares high-quality liquid assets with net cash outflows over a 30-day stress horizon. The net stable funding ratio addresses structural funding over a one-year horizon, while the leverage and capital ratios are solvency measures.

Question 43Treasury Markets

A treasurer is offered a quotation of 5.10 per cent discount rate on a 180-day bill with a face value of 5,000,000. What is the approximate purchase price?

  1. 5,127,500
  2. 4,872,500 Correct answer.
  3. 4,745,000
  4. 4,875,000

Explanation

The discount is face value multiplied by the discount rate and the day-count fraction: 5,000,000 x 0.0510 x 0.5 gives 127,500. Subtracting this from face value gives a price of 4,872,500.

Question 44Treasury Markets

A treasurer wants to know why a swap's fixed rate differs from the yield on a government bond of the same maturity. Which explanation is most accurate?

  1. The swap rate always equals the government bond yield at the same maturity
  2. The swap rate reflects interbank credit and liquidity premia embedded in the floating index and fixed leg Correct answer.
  3. The swap rate ignores credit risk entirely
  4. The swap rate is set by regulators and cannot diverge from government yields

Explanation

Swap rates are derived from the expected path of the floating index, which reflects bank funding costs, plus term and liquidity premia on the fixed leg. This is why the swap spread over government yields varies over time and can be positive or negative.

Question 45Treasury Markets

A treasurer is told that a bond is quoted on a clean price basis. Which statement describes the settlement amount?

  1. The settlement amount equals the clean price minus accrued interest
  2. The settlement amount equals the dirty price, which is the clean price plus accrued interest Correct answer.
  3. The settlement amount equals the clean price with no adjustment
  4. The settlement amount equals the face value regardless of price

Explanation

Bond markets quote clean prices, but settlement is at the dirty price, which adds accrued interest to compensate the seller for interest earned since the last coupon. The clean price alone is not the cash consideration.

Question 46Treasury Markets

A treasurer expects the yield curve to steepen, with short rates falling and long rates rising. Which position best expresses this view?

  1. Receiving fixed in a two-year swap and paying fixed in a ten-year swap Correct answer.
  2. Receiving fixed in both a two-year and a ten-year swap
  3. Paying fixed in both a two-year and a ten-year swap
  4. Paying fixed in a two-year swap and receiving fixed in a ten-year swap

Explanation

Receiving fixed in the short tenor profits from falling short rates, while paying fixed in the long tenor profits from rising long rates. Together the position gains if the curve steepens. The opposite combination expresses a flattening view.

Question 47Treasury Markets

A treasurer is assessing a counterparty with a credit rating downgrade and wants to understand the effect on an existing swap. Which statement is most accurate?

  1. The swap's notional is immediately repaid to the counterparty
  2. The swap's fixed rate is automatically reset to reflect the new rating
  3. The swap is automatically terminated at par
  4. The swap's mark-to-market exposure for the non-defaulting party increases in significance because default risk is higher Correct answer.

Explanation

A downgrade raises the probability of default, so the replacement cost exposure already embedded in the mark-to-market becomes more valuable to protect. Collateral terms such as thresholds and rating triggers may also tighten under the credit support annex.

Question 48Treasury Markets

A treasurer is comparing the funding cost of issuing a floating-rate note at the reference index plus 80 basis points with entering a swap to convert the proceeds to fixed. Which additional factor must be included to compare the all-in fixed cost fairly?

  1. The credit rating of the note's investors
  2. The note's face value only
  3. The note's issue spread over the index and the swap spread paid to fix the rate Correct answer.
  4. The coupon payment dates of the note alone

Explanation

The all-in fixed cost combines the spread paid on the note over the index with the fixed rate paid in the swap, adjusted for the floating leg received. Ignoring either component misstates the true funding cost.

Question 49Treasury Markets

A treasurer holds a portfolio of fixed-rate assets funded by floating-rate liabilities and expects rates to rise. Which action best reduces the resulting margin compression?

  1. Reducing the floating-rate funding and holding more cash
  2. Entering a receiver interest rate swap on the funding notional
  3. Entering a payer interest rate swap on the funding notional Correct answer.
  4. Extending the duration of the asset portfolio

Explanation

A payer swap gains when rates rise, offsetting the higher cost of floating-rate funding against fixed-rate assets. Extending asset duration would worsen the mismatch because fixed asset yields would lag rising funding costs.

Question 50Treasury Markets

A treasurer is evaluating a cross-currency basis swap and observes a negative basis on one currency. Which interpretation is most accurate?

  1. The currency trading at a negative basis is in demand, so holders pay a premium to swap into it Correct answer.
  2. A negative basis indicates the currency is expected to appreciate sharply
  3. A negative basis means the swap has no credit risk
  4. The currency trading at a negative basis is in surplus and lenders pay to borrow the other currency

Explanation

A negative cross-currency basis means parties are willing to pay a premium to obtain the currency, reflecting strong demand for it in funding markets. The basis compensates for that imbalance rather than predicting appreciation or eliminating credit risk.