30. X. Price sensitivity techniques I. Maturity gap management
Y. Cash flow techniques II. Key rate duration
III. Convexity
31. X. Z Bonds I. No reinvestment risk during the
accretion phase.
Y. Accretion-directed Classes II. Do not extend even if there are no
prepayments.
III. Price is highly sensitive to interest
rate movements.
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Morning Session
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Morning Session
32. You are given the following information with respect to a portfolio:
•duration: 3
•dispersion: 0.75
•all cash flows are positive
Time ( t ) PV CFt
1 1
2 X
3 Y
4 0
5 1
Determine the minimum value of Y .
(A) 0
(B) 3
(C) 4
(D) 9
(E) 26
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Morning Session
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Morning Session
33. You are given the following with respect to a multiplicative binomial model:
•the current short rate is 4%
•rates are twice as likely to rise as they are to fall
•the volatility parameter is 20%
Determine the expected short rate two periods from now.
(A) 3.65
(B) 4.13
(C) 4.31
(D) 4.55
(E) 4.65
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Morning Session
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Course 6: Spring 2004 - 39 - STOP
Morning Session
34. You are given the following with respect to a mutual fund:
•annual expense ratio: 1%
•gross annual rate of return: 10%
The back-end load fee starts at 4% and reduces by 0.5% on each anniversary.
An investor makes an initial investment of 5,000 on January 1, 2002.
Calculate the realized gain if the investor sells the shares on December 31, 2004.
(A) 941
(B) 1,216
(C) 1,281
(D) 1,313
(E) 1,455
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Morning Session
COURSE 6
AFTERNOON SESSION
SECTION C – WRITTEN ANSWER
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Afternoon Session
**BEGINNING OF EXAMINATION**
AFTERNOON SESSION
8. (4 points) Describe the practical difficulties that may be encountered while implementing
an asset allocation optimization model.
9. (5 points) You are given the following information about a universe of securities:
•Rf : 0.0300
•E RM : 0.0700
•2
s M : 0.0450
The market covariance grid is:
Security Market Weight Covariance Matrix
A 0.35 9% 2% 2% 8%
B 0.25 2% 12% 1% 2%
C 0.25 2% 1% 3% 5%
D 0.15 8% 2% 5% 12%
(a) Calculate the market price of risk.
(b) Calculate the contribution to the variance of the market portfolio for securities
B and D.
(c) Calculate the equilibrium expected rate of return for securities B and D.
Show all work.
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Afternoon Session
10. (6 points) You are given the following with respect to T-bills issued on February 1,
2004:
Term to Maturity Spot Price
1 month 98.50
2 months 98.40
3 months 98.20
4 months 98.00
A futures contract is available for delivery of a 3-month T-bill on March 1, 2004.
(a) Compare forward contracts to futures contracts.
(b) Determine the implied price of the futures contract.
(c) Recommend an arbitrage strategy to be implemented on February 1, 2004 if the
market price of the futures contract at that time is 97.5. Calculate the profit and
cash flows each month until all contracts are mature.
Show all work.
11. (6 points) You are given the following with respect to a one-period interest rate
contingent claim:
•martingale probability: 50%
•variance of the security: 0.2755%
•risk- free rate: 5%
•payment if interest rates go up: 105
•payment if interest rates go down: 95
(a) Calculate the martingale security price.
(b) Calculate the “true” market price of risk.
(c) Calculate the “true” probability.
Show all work.
Course 6: Spring 2004 - 3 - GO ON TO NEXT PAGE
Afternoon Session