20. X. Spread analysis I. Compares the total return and
duration of various assets
Y. Relative return value analysis II. Analyzes prices and yields by bond
market sector
III. Uses regression to determine
portfolio expectations
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Morning Session
21-26. Questions 21 through 26 consist of an assertion in the left-hand column and a reason in
the right-hand column. Code your answer to each question by blackening space:
(A) If both the assertion and the reason are true statements, and the reason is a correct
explanation of the assertion.
(B) If both the assertion and the reason are true statements, but the reason is NOT a
correct explanation of the assertion.
(C) If the assertion is a true statement, but the reason is a false statement.
(D) If the assertion is a false statement, but the reason is a true statement.
(E) If both the assertion and the reason are false statements.
21.
ASSERTION
Discounting the scheduled stream
of cash flows by the forward rates
provides the market value of a
callable bond.
BECAUSE
REASON
Forward rates can be used to
determine the value of any stream
of fixed cash flows.
22.
ASSERTION
As interest rates increase, the
effective duration of a callable
bond decreases.
BECAUSE
REASON
Effective duration recognizes the
fact that yield changes may
change the expected cash flows.
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Morning Session
23.
ASSERTION
Value-at-risk models have
limited ability to capture the risks
of exceptional market events.
BECAUSE
REASON
Value-at-risk models use average
historical correlations among asset
prices to make statistical
assessments.
24.
ASSERTION
FASB 87 requires both pension
assets and liabilities to be marked
to market.
BECAUSE
REASON
Prior to FASB 87, any underfunding
of a pension plan was
reported in the footnotes to the
financial statements.
25.
ASSERTION
A callable bond has positive
convexity.
BECAUSE
REASON
A callable bond may be viewed as
a long position in a bond and a
long position in an option.
26.
ASSERTION
An Arrow-Debreu security pays
one unit in one state of nature and
nothing in all other states.
BECAUSE
REASON
The single-period securities
market model is arbitrage free if
and only if there exists a state
price vector.
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Morning Session
27. You are given the following:
Country Expected One-year Investment Return
U.S. 4%
China 6%
The current exchange rate is 8.27 Chinese RMB per U.S. Dollar.
Calculate the no-arbitrage one-year future exchange rate.
(A) 8.11
(B) 8.29
(C) 8.43
(D) 8.60
(E) 8.77
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Morning Session
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Morning Session
28. You are given the following for a binomial option pricing model:
• Length of interval: 4 years
• Annual volatility: 0.5
• Annual interest rate: 5.0%
Calculate the probability value q .
(A) 0.15
(B) 0.36
(C) 0.64
(D) 0.68
(E) 0.88
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Morning Session