3. X. Tracking error of 68 basis points I. Assuming a normal distribution, there
is a 68% probability that the portfolio
return over the next year will be
within one standard deviation of the
annualized benchmark return
Y. Portfolio β of 68% II. The portfolio has less volatility than
the benchmark
III. Expect a 68 basis point increase in the
portfolio return if there is a 100 basis
point increase in the benchmark return
4. X. Planned amortization classes I. Priced at tighter spreads to the
Treasury curve than sequential-pay
bonds
Y. Accretion-directed classes II. Redirect principal only
III. Complete protection against
extension of average life if interest
rates rise
5. X. Increase in volatility I. Decreases the value of a putable
bond
Y. Decrease in volatility II. Increases the value of a call option
III. For a given price, increases the
option-adjusted spread for a putable
bond
Course 6: Spring 2005 - 10 - GO ON TO NEXT PAGE
Morning Session
6-10. Questions 6 through 10 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.
6.
ASSERTION
Returns on the S&P 500 stock
index are not affected by stock
splits.
BECAUSE
REASON
Returns on market-value-weighted
indices are based on holding
investments in proportion to their
market values.
7.
ASSERTION
The extended Vasicek model is
able to provide an exact fit to the
current term structure of interest
rates.
BECAUSE
REASON
The drift term in the extended
Vasicek model is time-independent.
Course 6: Spring 2005 - 11 - GO ON TO NEXT PAGE
Morning Session
8.
ASSERTION
Firm-wide stress tests are
reviewed frequently but changed
infrequently.
BECAUSE
REASON
Stress tests may be usefully
applied to markets in which
illiquid conditions produce asset
price jumps and impede securities
trading during times of stress.
9.
ASSERTION
The FHA experience method is
rarely used as a prepayment
model.
BECAUSE
REASON
The FHA experience method does
not reflect the effect of age on prepayments.
10.
ASSERTION
If a risk-free asset is available,
only aggressive investors will be
affected by a restriction on
borrowing.
BECAUSE
REASON
A borrowing restriction drives
aggressive investors to portfolios
on the efficient frontier of risky
assets.
Course 6: Spring 2005 - 12 - GO ON TO NEXT PAGE
Morning Session
11. A fixed-rate bond with a market value of 20 million and a duration of 4 is separated into
three bonds. Two of the bonds are floaters and the third is an inverse floater.
You are given the following information with respect to the floaters:
Floater Market Value Duration
A 16 million 1
B 2 million 0.5
Calculate the duration of the inverse floater.
(A) 2.50
(B) 3.06
(C) 3.15
(D) 25.20
(E) 31.50
Course 6: Spring 2005 - 13 - GO ON TO NEXT PAGE
Morning Session
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Course 6: Spring 2005 - 14 - GO ON TO NEXT PAGE
Morning Session