Hull Chapter 4 - Interest Rates

Question 1

Describe Treasury Rates

Answer 1

Treasury rates are the rates an investor earns on Treasury bills and Treasury bonds. These are the instruments used by a government to borrow in its own currency.

It is usually assumed that there is no chance that a government will default on an obligation denominated in its own currency. Therefore, Treasury rates are totally risk-free rates.

Question 2

Describe LIBOR

Answer 2

LIBOR is short for London Interbank Offered Rate. It is the reference interest rate, produced once a day, and is designed to reflect the rate of interest at which banks are prepared to make large wholesale deposits with other banks.

Question 3

Zero Rates

Answer 3

The n-year zero coupon interest rate is sometimes also referred to as the n-year spot rate, the n-year zero rate, or just the n-year zero.

Question 4

2001 Q27.a

Briefly describe a forward-rate agreement (FRA)

Answer 4

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