Question 1

Jayce Arnold, a CFA candidate, is studying how the market yield environment a ects bond prices. She considers a $1,000 face value, option-free bond issued at par. Which of the following statements about the bond's dollar price behavior is most likely accurate when yields rise and fall by 200 basis points, respectively? Price will:

Options :

A : increase by $124, price will decrease by $149.

B : increase by $149, price will decrease by $124.

C : decrease by $124, price will increase by $149.

D : decrease by $149, price will increase by $124.

Answer: C

Question 2

A fund holds $10 million nominal of the XYZ 5.5% 30-year bond. It enters into a one month dollar roll with arepo dealer bank in which it sells the security at a price of 100-08 and buys it back at a forward price of par.Assuming that the security experiences a 2% paydown (scheduled principal plus prepayments) during the term ofthe trade, estimate the value of the drop.

Options :

A : $25,000

B : $225,000

C : $200,000

D : $800,000

Answer: B

Question 3

Immunization is the process of o setting the e ects of interest-rate changes on the value of assets and liabilities. Coverage of liabilities with signi cant convexity may be more e ectively matched with a:

Options :

A : callable bond portfolio, especially in a declining-rate environment.

B : bullet portfolio with little convexity.

C : barbell portfolio with positive convexity.

D : mortgage portfolio, especially in a highly volatile rate environment.

Answer: C

Question 4

A risk manager at an investment bank is examining the forward and futures contracts the bank’s clients use as hedging instruments. The manager compares the way the two types of contracts are priced, how profits and losses are calculated, and how decisions to offset or deliver against the contracts are made. Which of the following statements is correct?

Options :

A : When the price of an asset is positively correlated with interest rates, the forward contract will typically have a higher price than the futures contract.

B : The daily profit and loss on forward and futures contracts differ, since futures contracts realize profits and losses each day while forward contracts realize them at maturity.

C : Prices on similar forward and futures contracts will be the same due to the no-arbitrage relationship between forwards and futures.

D : If interest rates are higher than the income generated by a financial asset, delivery of the asset against the futures contract will take place on the latest date possible.

Answer: B

Question 5

A senior analyst at a financial institution is giving a presentation to a group of junior analysts on the features of the power law and its uses. The senior analyst notes that the power law is particularly important in understanding the tails of distributions. Which of the following is correct regarding the power law?

Options :

A : The power law specifies the probability of observing a value greater than a given value.

B : Power law tails are only observed in normal distributions.

C : The power law models the slow decline in the probability of observing large values in thin-tailed distributions.

D : Power law tails are not present in the Student’s t distribution.

Answer: A