8006 Practice Exam Questions and Answers

[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 is not an approach to attempt to value to a convertible security:

A borrower who fears a rise in interest rates and wishes to hedge against that risk should:

Calculate the net payment due on a fixed-for-floating interest rate swap where the fixed rate is 5% and the floating rate is LIBOR + 100 basis points. Assume reset dates are every six months, LIBOR at the beginning of the reset period is 4.5% and at the end of the period is 3.5%. Notional is $1m.

A fund manager buys a gold futures contract at $1000 per troy ounce, each contract being worth 100 ounces of gold. Initial margin is $5,000 per contract, and the exchange requires a maintenance margin to be maintained at $4,000 per contract. What is the most prices can fall before the fund manager faces a margin call?

Credit risk in the case of a CDO (Collateralized Debt Obligation) is borne by:

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.

Imagine two perpetual bonds, ie bonds that pay a coupon till perpetuity and the issuer does not have an obligation to redeem. If the coupon on Bond A is 5%, and on Bond B is 15%, which of the following statements will be true:

I. The Macaulay duration of Bond A will be 3 times the Macaulay duration of Bond

B.  

II. Bond A and Bond B will have the same modified duration

III. Bond A will be priced at less than 1/3rd the price of Bond B

IV. Both Bond A and Bond B will have a duration of infinity as they never mature

A bank holds a portfolio of residential mortgages. An increase in the volatility of mortgage interest rates leads to:

When comparing compound interest rates to equivalent continuously compounded rates of return, the latter will always be:

[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.]

A long call position in an asset-or-nothing option has the same payoff as: