18. X. Enhanced indexing strategy I. Least risk of underperforming the
index.
Y. Pure bond index matching II. Matches primary risk factors without
acquiring each issue in the index.
III. Common strategy used by smaller
funds.
19. X. Caps and Floors I. Protect the user from changes in
interest rate volatility.
Y. Interest Rate Swaps II. Provide asymmetric coverage in
capping liability costs.
III. Protect the rate of return on assets.
Course 6: Spring 2003 - 28 - GO ON TO NEXT PAGE
20. X. Collateralized mortgage obligation
(CMO) classes that provide for
redirection of principal payments
I. Accretion-directed classes
Y. CMO classes that provide for
redirection of interest payments
II. Targeted amortization classes
III. Z bonds
21. X. Pure Expectations Theory
I. Term structure of interest rates reflects
the market’s current expectations of
future short-term rates.
Y. Market Segmentation Theory II. Market participants have investment
strategies dictated by the nature of their
liabilities.
III. Does not account for risks inherent in
investing in bonds.
22. X. Digital options I. Payoff depends on whether the
underlying asset value is above or
below a fixed amount on the expiration
date.
Y. Gap options II. Include all-or-nothing options.
III. Payoff is only made if the asset price on
the expiration date is above or below a
strike price different from that used for
the payoff.
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18-23. Each of questions 18 through 23 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).
23. X. Interest rate collar I. Purchase of a cap at one strike rate and
the sale of a floor at a lower strike rate.
Y. Interest rate corridor II. Purchase of a cap at one strike rate and
the sale of another cap at a higher strike
rate.
III. Described as swapping into a bond.
Course 6: Spring 2003 - 31 - GO ON TO NEXT PAGE
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24. You are given the following with respect to a convertible bond:
•coupon: 5%
•redemption value: 100
•current market price: 100
•conversion ratio: 1.18
•floor price: 97.00
•stock price: 82.75
Calculate the minimum value of this bond.
(A) 95.00
(B) 97.00
(C) 97.65
(D) 100.00
(E) 100.25
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25. You are given the following with respect to a putable bond:
•annual coupon rate: 8%
•time to maturity: 2 years
•current put price: 105
•put price in one year: 102
•current one-year interest rate: 6%
•one-year interest rate in one year:
4.8% or 7.5%
with equal probability
Calculate the value of the put option.
(A) 0.00
(B) 0.72
(C) 1.45
(D) 4.27
(E) 5.00
Course 6: Spring 2003 - 35 - GO ON TO NEXT PAGE
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Course 6: Spring 2003 - 36 - GO ON TO NEXT PAGE

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