21.
ASSERTION
Given the choice, investors prefer
a portfolio on a higher
indifference curve.
BECAUSE
REASON
Higher indifference curves
correspond to higher levels of
utility.
22.
ASSERTION
A callable bond is negatively
convex.
BECAUSE
REASON
A call option increases a bond’s
effective duration when interest
rates fall.
Course 6: Spring 2004 - 30 - GO ON TO NEXT PAGE
Morning Session
23.
ASSERTION
Modified duration is an
inappropriate measure for bonds
with embedded options.
BECAUSE
REASON
Modified duration assumes a flat
yield curve.
24.
ASSERTION
Dividend scale guarantees are put
options within a participating life
insurance policy.
BECAUSE
REASON
A put option gives the purchaser
the right to sell at a fixed price.
Course 6: Spring 2004 - 31 - GO ON TO NEXT PAGE
Morning Session
25-31. Each of questions 25 through 31 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).
25. X. Refunding Provision I. Will not provide protection against
the issuance of common stock to
retire debt.
Y. Call Provision II. Bonds cannot be redeemed for any
reason.
III. Provides redemption protection
against the issuance of debt ranking
equal to or superior to the debt to be
redeemed.
26. X. Multivariate density estimation
(MDE)
I. Chooses points which are as
uniformly distributed as possible.
Y. Low-discrepancy method II. Can only be used for classes of
financial instruments for which
liquid markets exist.
III. Nonparametric, model-free
approach.
Course 6: Spring 2004 - 32 - GO ON TO NEXT PAGE
Morning Session
27. X. Amortized cost method I. Assets held to maturity
Y. Market value method II. Assets available for sale
III. Assets for trading
28. X. Return simulation I. Evaluates the current level of yields
by producing spot, discount, and
forward rate structures.
Y. Term-structure analysis II. Predicts bond and portfolio behavior
given alternative interest rate
scenario projections.
III. Values Treasury securities.
29. X. Duration bets I. Pure index match
Y. No duration bets II. Minor mismatches
III. Full-blown active
Course 6: Spring 2004 - 33 - GO ON TO NEXT PAGE
Morning Session
25-31. Each of questions 30 through 31 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).

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