5.
ASSERTION
The original loan-to-value ratio
overestimates the measurement
of defaults for home mortgages.
BECAUSE
REASON
As home mortgages become more
seasoned, default rates tend to
decline.
6.
ASSERTION
Preferred stock payments are taxdeductible
for the issuing
corporation.
BECAUSE
REASON
Preferred stock payments are
treated as dividends.
Course 6: Spring 2004 - 16 - GO ON TO NEXT PAGE
Morning Session
7.
ASSERTION
An option-adjusted spread (OAS)
value by itself does not provide
sufficient information to
determine whether a bond is rich
or cheap.
BECAUSE
REASON
OAS is the spread to short-term
interest rates that equates the
theoretical price of a bond to its
market price.
8.
ASSERTION
Interest rate caps and floors
should not be used when the
holding period of the underlying
asset or liability is flexible or
subject to change.
BECAUSE
REASON
Termination of interest rate caps
and floors involves exit costs.
9.
ASSERTION
A trustee may engage in a
transaction that breaches another
duty to the detriment of the
participants because he is
instructed to do so in accordance
with the trust agreement.
BECAUSE
REASON
The trustee is under the obligation
to manage the trust in accordance
with the trust agreement.
Course 6: Spring 2004 - 17 - GO ON TO NEXT PAGE
Morning Session
10-16. Each of questions 10 through 16 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).
10. X. Real Assets I. Patents
Y. Financial Assets II. Appear only on the asset side of the
balance sheet
III. Are created and destroyed in the
ordinary course of doing business
11. X. Callable Bonds I. Bond price at low yields is
approximately equal to the price of
an option- free bond.
Y. Putable Bonds II. Negative convexity at low yield
levels and positive convexity at high
yield levels.
III. Positive convexity at all yield levels.
Course 6: Spring 2004 - 18 - GO ON TO NEXT PAGE
Morning Session
12. X. Lattice methods I. Allow for more realistic jumps in
interest rates of varying amounts
along a single path.
Y. Simulation methods II. Easier to use to value instruments
that have embedded American-style
options.
III. Easier to use when more than one
factor changes at the same time.
13. X. Forward contracts I. Dealer or broker
Y. Futures contracts II. Bid-ask spread
III. High liquidity

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