8006 Practice Exam Questions and Answers

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

Which of the following is not an approach to attempt to value to a convertible security:

A borrower who fears a rise in interest rates and wishes to hedge against that risk should:

Calculate the net payment due on a fixed-for-floating interest rate swap where the fixed rate is 5% and the floating rate is LIBOR + 100 basis points. Assume reset dates are every six months, LIBOR at the beginning of the reset period is 4.5% and at the end of the period is 3.5%. Notional is $1m.

A fund manager buys a gold futures contract at $1000 per troy ounce, each contract being worth 100 ounces of gold. Initial margin is $5,000 per contract, and the exchange requires a maintenance margin to be maintained at $4,000 per contract. What is the most prices can fall before the fund manager faces a margin call?

Credit risk in the case of a CDO (Collateralized Debt Obligation) is borne by:

A bond with a 5% coupon trades at 95. An increase in interest rates by 10 bps causes its price to decline to $94.50. A decrease in interest rates by 10 bps causes its price to increase to $95.60. Estimate the modified duration of the bond.

Imagine two perpetual bonds, ie bonds that pay a coupon till perpetuity and the issuer does not have an obligation to redeem. If the coupon on Bond A is 5%, and on Bond B is 15%, which of the following statements will be true:

I. The Macaulay duration of Bond A will be 3 times the Macaulay duration of Bond

B.  

II. Bond A and Bond B will have the same modified duration

III. Bond A will be priced at less than 1/3rd the price of Bond B

IV. Both Bond A and Bond B will have a duration of infinity as they never mature

A bank holds a portfolio of residential mortgages. An increase in the volatility of mortgage interest rates leads to:

When comparing compound interest rates to equivalent continuously compounded rates of return, the latter will always be:

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

A long call position in an asset-or-nothing option has the same payoff as:

Which of the following is an example of a multifactor model explaining expected asset returns:

I. Arbitrage pricing theory

II. Single index model

III. Capital asset pricing model

Which of the following statements are true:

I. The convexity of a zero coupon bond maturing in 10 years is more than that of a 4% coupon bond with a modified duration of 10 years

II. The convexity of a bond increases in a linear fashion as its duration is increased

III. Convexity is always positive for long bond positions

IV. The convexity of a zero coupon bond maturing in 10 years is less than that of a 4% coupon bond maturing in 10 years

What is the yield to maturity for a 5% annual coupon bond trading at par? The bond matures in 10 years.

If the zero coupon spot rate for 3 years is 5% and the same rate for 2 years is 4%, what is the forward rate from year 2 to year 3?

Security A and B both have expected returns of 10%, but the standard deviation of Security A is 10% while that of security B is 20%. Borrowings are not permitted. A portfolio manager who wishes to maximize his probability of earning a 25% return during the year should invest in:

What is the day count convention used for US government bonds?

If zero rates with continuous compounding for 4 and 5 years are 4% and 5% respectively, what is the forward rate for year 5?

If the exchange rate for USD/AUD is 0.6831 and the rate for SEK/USD is 8.1329, what is the SEK/AUD cross rate?

Which of the following statements are true:

I. The swap rate, also called the swap spread, is initially calculated so that the value of the swap at inception is zero.

II. The value of a swap at initiation is different from zero and is equal to the difference between the NPV of the cash flows of the two legs of the swap

III. OTC swaps are standardized and limited to a defined set of standard contracts

IV. Interest rate and commodity swaps are the types of swaps that are most traded

What is the running yield on a 6% coupon bond selling at a clean price of $96?

A stock has a spot price of $102. It is expected that it will pay a dividend of $2.20 per share in 6 months. What is the price of the stock 9 months forward? Assume zero coupon interest rates for 6 months to be 6%, for 9 months to be 7%, and 12 months to be 8% - all continuously compounded.

The spot exchange rate between USD and AUD is 0.70. The risk free interest rates in the US and Australia are 2% and 3.5% respectively. What is the forward exchange rate between the two currencies one year hence?

Security A has a beta of 1.2 while security B has a beta of 1.5. If the risk free rate is 3%, and the expected total return from security A is 8%, what is the excess return expected from security B?

A bond with a 5% coupon trades at 95. An increase in interest rates by 10 bps causes its price to decline to $94.50. A decrease in interest rates by 10 bps causes its price to increase to $95.60. Estimate the convexity of the bond.

Which of the following are valid credit enhancements used for credit derivatives:

I. Overcollateralization

II. Excess spread

III. Cash reserves

IV. Margin requirements

Which of the following is one of the basic axioms on which the principle of maximum expected utility is based:

The yield offered by a bond with 18 months remaining to maturity is 5%. The coupon is 3%, paid semi-annually, and there are two more coupon payments to go in addition to the interest payment made at maturity. What is the bond's price?

The zero rates for 1, 2 and 3 years respectively are 2%, 2.5% and 3% compounded annually. What is the value of an FRA to a bank which will pay 4% on a principal of $10m in year 3?

Which of the following statements is true:

I. The standard deviation of a short position is the same as the standard deviation of a long position

II. The expected return of a short position is the same as that a long position in the same asset

III. If two assets are perfectly positively correlated, then a short position in one and a long position in the other are negatively correlated

IV. If we increase the weight of an asset in a portfolio, its correlation with other assets in the portfolio scales up proportionately

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

A company that uses physical commodities as an input into its manufacturing process wishes to use options to hedge against a rise in its raw material costs. Which of the following options would be the most cost effective to use?

If the spot price for a commodity is lower than the forward price, the market is said to be in:

What is the notional value of one equity index futures contract where the value of the index is 1500 and the contract multiplier is $50:

A bank sells an interest rate swap to its client, with the client agreeing to pay the bank a fixed 4% and receive 3 month LIBOR + 100 basis points, payments due every quarter. After quarter 1, the 3 month LIBOR is 2% pa. Which of the following payments will happen in respect of this swap, assuming the contract notional is $100m, and the rate convention is 30/360.

If the quoted discount rate of a 3 month treasury bill futures contract is 10%, what is the price of a 3-month treasury bill with a principal at maturity of $100?

Which of the following statements are true:

I. All investors regardless of their expectations face the same efficient frontier which is always the market portfolio

II. Investors will have different efficient frontiers based upon their views of expected risks, returns and correlations

III. Investors risk appetite will determine their choice of the combination of risk-free and risky assets to hold

IV. If all investors have identical views on expected returns, standard deviation and correlations, they will hold risky assets in identical proportions

Which of the following statements is true:

I. The OTC market for foreign exchange is much larger than the exchange traded futures market for foreign currencies

II. DVP arrangements help avoid the risk of counterparty defaults on settlements

III. Exchanges offer the advantage of lower trading costs than ECNs

IV. ISDA master agreements form the basis of a large number of OTC derivative trades

A large utility wishes to issue a fixed rate bond to finance its plant and equipment purchases. However, it finds it difficult to find investors to do so. But there is investor interest in a floating rate note of the same maturity. Because its revenues and net income tend to vary only predictably year to year, the utility desires a fixed rate liability. Which of the following will allow the utility to achieve its objectives?

A stock is selling at $90. An investor writes a covered call on the stock with an exercise price of $100 in return for a premium of $3 per share. What would be the maximum gain or loss per share that the investor could make on this position?

Which of the following statements are true:

I. Cash markets tend to be more liquid than derivative markets

II. A higher credit risk is associated with lower liquidity in times of crises

III. A higher bid-ask spread indicates greater liquidity when compared to a lower bid-ask spread

IV. A higher normal market size indicates greater liquidity than a lower market size

Which of the following statements is true for a Credit Linked Note (CLN)?

If the implied volatility is known for a call option, what can be said about the implied volatility for a put option with the same strike and maturity?

Assuming zero taxes, the effect of increasing leverage in the capital structure of a firm is to:

Callable corporate bonds: