Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition (8006) Free Practice Test

Question 1

A company has a long term loan from a bank at a fixed rate of interest. It expects interest rates to go down.
Which of the following instruments can the company use to convert its fixed rate liability to a floating rate liability?

A. A forward rate agreement

B. Interest rate futures

C. A fixed for floating interest rate swap

D. A currency swap

Correct Answer: C

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 2

A 15 year bond is trading at par. Its modified duration is 11 years and convexity is 80. Determine the price of the bond following a 10 basis point increase in interest rates

A. $101.096

B. $101.104

C. $98.90

D. $98.904

Correct Answer: D

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 3

A bond with a 5% coupon trades at 95. An increase in interest rates by 10 bps causes its price to decline to
$94.50. A decrease in interest rates by 10 bps causes its price to increase to $95.60. Estimate the modified duration of the bond.

A. 5.79

B. -5

C. 5.5

D. 5

Correct Answer: A

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 4

Which of the following cause convexity to increase:
I. Increase in yields
II. Increase in maturity
III. Increase in coupon rate
IV. Increase in duration

A. I and III

B. I and IV

C. II, III and IV

D. II and IV

Correct Answer: D

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 5

Which of the following statements is true:
I. In a Dutch auction, every successful bidder pays the same price regardless of their bid II. In a standard auction, every successful bidder pays the same price regardless of their bid III. Dutch auctions start high and progressive bids are lower IV. Standard auctions start high and progressive bids are lower

A. I and III

B. II and IV

C. I and II

D. I, II and IV

Correct Answer: A

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 6

The underlying objective in decisions relating to capital structure is to:

A. minimize the tax burden

B. maximize value for shareholders and debt holders

C. maximize value for all stakeholders

D. maximize shareholder value

Correct Answer: D

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 7

Which of the following statements are true:

A. The mean-variance criterion is a simplification of the principal of maximum expected utility

B. The mean-variance criterion is inferior to the principal of maximum expected utility

C. The mean-variance criterion is the same thing as the principal of maximum expected utility

D. The mean-variance criterion is superior to the principal of maximum expected utility

Correct Answer: A

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 8

A stock has a spot price of $102. It is expected that it will pay a dividend of $2.20 per share in 6 months. What is the price of the stock 9 months forward? Assume zero coupon interest rates for 6 months to be 6%, for 9 months to be 7%, and 12 months to be 8% - all continuously compounded.

A. $105.25

B. $94.76

C. 104.26

D. $100

Correct Answer: A

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 9

Which of the following statements is INCORRECT according to CAPM:

A. expected returns on an asset will equal the risk free rate plus a compensation for the additional risk measured by the beta of the asset

B. the return expected by investors for holding the risky asset is a function of the covariance of the risky asset to the market portfolio

C. portfolios on the efficient frontier have different Sharpe ratios

D. securities with a higher standard deviation of returns will have a higher expected return

Correct Answer: D

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 10

The vast majority of exchange traded futures contracts are:

A. cash settled upon expiry

B. settled using physical settlements

C. settled by delivery

D. closed by an offsetting trade prior to expiry

Correct Answer: D

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 11

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.] Which of the following best describes a holder extendible option:

A. an option in which the holder of the option has the option to extend the expiry of the option in case the option expires out of the money

B. an option in which the buyer of the option has the option to extend the expiry of the option upon the payment of an extra premium

C. an option whose expiry is automatically extended if it finishes out of the money.

D. an option in which the seller of the option can extend the expiry of the option if the underlying's price is beyond an agreed threshold

Correct Answer: B

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 12

It is January and an Australian importer needs to pay USD 1,120,000 at the end of August to a US creditor. If a AUD/USD futures contract is trading on the exchange at a futures price of 0.6750 (ie, 1 AUD = 0.6750 USD), and the contract size is USD 100,000, what would represent an appropriate hedge?

A. Buy 17 contracts to the September expiry date which are closed out in August at the end of August.

B. Buy 11 contracts to the September expiry date which are closed out in August at the end of August.

C. Buy 11 contracts to the September expiry date and receive delivery of USDs in September

D. Sell 11 contracts to the September expiry date and make delivery of USDs in September

Correct Answer: B

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 13

If zero rates with continuous compounding for 4 and 5 years are 4% and 5% respectively, what is the forward rate for year 5?

A. 7%

B. 9.097%

C. 9%

D. 5%

Correct Answer: C

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 14

By market convention, which of the following currencies are not quoted in terms of 'direct quotes' versus the USD?

A. EUR

B. KWD

C. CAD

D. INR

Correct Answer: A

Explanation: Only visible for TestSimulate members. You can sign-up / login (it's free).

Question 15

Which of the following expressions represents the Treynor ratio, where is the expected return, is the standard deviation of returns, rm is the return of the market portfolio and rf is the risk free rate:
A)