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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

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Total Questions : 287

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Question # 1

[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:

Options:

A.  

DCF analysis

B.  

Bootstrapping

C.  

Lower of bond value and value of converted shares

D.  

Bond value plus equity option value

Discussion 0
Question # 2

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

Options:

A.  

Go short an FRA

B.  

Go long an FRA

C.  

Buy fed futures

D.  

Sell T-bill futures

Discussion 0
Question # 3

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.

Options:

A.  

Fixed rate payer receives $2500

B.  

Fixed rate payer pays $2500

C.  

No payments need to be exchanged

D.  

Floating rate payer receives $5000

Discussion 0
Question # 4

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?

Options:

A.  

$20 per ounce

B.  

$1,000 per ounce

C.  

$10 per ounce

D.  

$0 per ounce

Discussion 0
Question # 5

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

Options:

A.  

The sponsoring institution

B.  

Investors

C.  

The reference entity

D.  

The Special Purpose Vehicle (SPV)

Discussion 0
Question # 6

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.

Options:

A.  

5

B.  

5.79

C.  

5.5

D.  

-5

Discussion 0
Question # 7

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

Options:

A.  

II

B.  

III and IV

C.  

IV and I

D.  

I and II

Discussion 0
Question # 8

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

Options:

A.  

A decrease in the value of the mortgage portfolio

B.  

An increase in the value of the mortgage portfolio

C.  

An increase in the duration of the mortgage portfolio

D.  

Both duration and value of the mortgage portfolio stay unchanged

Discussion 0
Question # 9

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

Options:

A.  

lower

B.  

higher

C.  

the same

D.  

cannot say with available information

Discussion 0
Question # 10

[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:

Options:

A.  

two long cash-or-nothing calls combined with a put at the same strike

B.  

a contingent premium option

C.  

a short cash-or-nothing call and a short vanilla call

D.  

a long cash-or-nothing call and a long vanilla call

Discussion 0
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