5. You are given the following information for a 15-year callable bond:
•annual coupon rate: 9% payable semi-annually
•price: 95.32
•effective duration: 3.17
•convexity measure (C): (67.31)
C
V V V
V y
2
2
0
0
2 bg
Calculate the price of the bond after a 50 basis point increase in interest rates.
(A) 93.65
(B) 93.97
(C) 95.32
(D) 96.67
(E) 96.99
COURSE 6: MAY 2002 GO ON TO NEXT PAGE
MORNING SESSION
6. You are given the following information with respect to a single-period securities model:
S P
S
0 10 10
1
11 33 0
11 0 0
11 0 22
b g
b g


L
N
MMM
O
Q
PPP
Determine the value of P which makes the model arbitrage-free.
(A) 14
(B) 15
(C) 16
(D) 17
(E) 18
COURSE 6: MAY 2002 GO ON TO NEXT PAGE
MORNING SESSION
7-16. Each of questions 7 through 16 consists of two lists. In the list at the left are two items,
lettered X and Y. In the list at the right are three items, numbered I, II, and III. ONE of
the lettered items is related in some way to EXACTLY TWO of the numbered items.
Indicate the related items using the following answer code:
Lettered Item Is Related to Numbered Items
(A) X I and II only
(B) X II and III only
(C) Y I and II only
(D) Y I and III only
(E) The correct answer is not given by (A), (B), (C) or (D).
7. X. Asian call options I. Payoffs depend on the average price
of the underlying asset during the
life of the option.
Y. Lookback call options II. Guarantees the purchase of the asset
at the lowest price during the life of
the option.
III. Can use averages for the exercise
price.
8. X. Cliquet option I. Guaranteed exchange-rate contracts.
Y. Quanto option II. A series of standard call options that
pays the annual increase in the
underlying assets.
III. The strike resets at the beginning of
each year.
COURSE 6: MAY 2002 GO ON TO NEXT PAGE
MORNING SESSION
9. X. Interest rate corridor I. The purchase of a cap at one strike
rate and the sale of a floor at a lower
strike rate.
Y. Interest rate collar II. The purchase of a cap at one strike
rate and the sale of another cap at a
higher strike rate.
III. Sometimes described as swapping
into a bond.
10. X. Zero-coupon convertible bond I. Sacrifice yield
Y. Putable convertible bond II. Greater credit risk
III. Lower premium
11. X. Modified duration I. Allows for changing cash flows as
interest rates change.
Y. Effective duration II. Does not allow for changing cash
flows as interest rates change.
III. Not an appropriate measure for
callable bonds.
COURSE 6: MAY 2002 GO ON TO NEXT PAGE
MORNING SESSION
7-16. Each of questions 7 through 16 consists of two lists. In the list at the left are two items,
lettered X and Y. In the list at the right are three items, numbered I, II, and III. ONE of
the lettered items is related in some way to EXACTLY TWO of the numbered items.
Indicate the related items using the following answer code:
Lettered Item Is Related to Numbered Items
(A) X I and II only
(B) X II and III only
(C) Y I and II only
(D) Y I and III only
(E) The correct answer is not given by (A), (B), (C) or (D).

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