6. (5 points) You are given the following:
Features
Bond Maturity (years) Annual Coupon Rate (%) Embedded Options
A 10 5% None
B 10 5% Put Option
C 10 7% None
D 10 7% Call Option
W 20 8% None
X 20 8% Put Option
Y 20 10% None
Z 20 10% Call Option
(a) Describe how bond features affect interest rate risk.
(b) An investor only buys bonds that have at least two of their features with high
sensitivity to interest rate changes. Identify the four bonds that this investor will
buy. Explain your answer.
7. (5 points)
(a) Describe the advantages of simulation techniques and lattice methods.
(b) Outline the issues that arise when implementing simulation techniques for a
mortgage-backed securities portfolio.
(c) Describe how lattice methods are used in a simulation model when evaluating a
mortgage-backed securities portfolio.
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Morning Session
COURSE 6
MORNING SESSION
SECTION B – MULTIPLE CHOICE
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Morning Session
1. You are given the following bond portfolio:
S&P
Rating
Percentage
of Portfolio
AAA 10%
AA+ 10%
BBB+ 10%
A+ 25%
D 2%
CC 3%
BBB- 15%
BB+ 5%
A 20%
Determine the percentage of the portfolio that is investment grade.
(A) 65%
(B) 75%
(C) 90%
(D) 95%
(E) 100%
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Morning Session
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Morning Session
2. You are given the following information for a mutual fund:
•net asset value (NAV) at December 31, 2003: 28
•income distribution per share in 2004: 0.4
•assets at December 31, 2004: 620,000
•liabilities at December 31, 2004: 14,600
•shares outstanding: 20,000
No securities were sold throughout the year. There are no capital gain distributions and
no fees in the year.
Calculate the effective annual interest rate of return for the mutual fund.
(A) 6.7%
(B) 8.1%
(C) 8.8%
(D) 9.5%
(E) 12.1%
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Morning Session
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Morning Session
3. A one-period securities market model is given by S 01 1 1.
2 1.6 0
1 0 0.8
0 0 1
S x
÷÷
÷
è
Determine the range of values for x so that this model is arbitrage free.
(A) x 4
(B) x 4
(C) x 0
(D) x 0
(E) no such x exists
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Morning Session
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Morning Session
4. You are given the following:
•expected return of market portfolio: 7.0%
•variance of market portfolio: 10.0%
•variance of Security A: 19.0%
•covariance of Security A and market portfolio: 25.0%
•risk- free rate: 5.0%
Calculate the expected return of Security A using CAPM.
(A) 7.6%
(B) 10.0%
(C) 14.2%
(D) 17.5%
(E) 22.5%
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Morning Session
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Morning Session
5-9. Questions 5 through 9 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.