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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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
29. You are given the following:
Portfolio Market Value Duration
Assets 100 5.2
Liabilities 85 4.4
Calculate the change in economic surplus if interest rates decline by 50 basis points.
(A) –1.5
(B) –0.7
(C) 0.0
(D) 0.7
(E) 1.5
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30. The tracking error for a portfolio is 50 basis points. Further analysis shows that the
tracking error for the systematic risk is 45 basis points. Calculate the tracking error for
the unsystematic risk.
(A) 2 basis points
(B) 5 basis points
(C) 14 basis points
(D) 22 basis points
(E) 25 basis points
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