1. Black-Scholes Model: Which of the following statement is true?
a) Black Scholes Formula discounts the current underlying price
b) N(d2) = Gamma
c) N(d1) = exercise probability in a risk free world
d) N(d1) = Delta
1. Swaps: Which statement is wrong?
a) Long IRS position means you receive fix and pay variable
b) Short IRS position means you receive fix and pay variable
c) Long basis swap means you receive and pay a variable rate
2. The option sensitivity Delta is the highest in which position?
a) Long Put, in the money
b) Short Call, out of the money
c) Short Put, in the money
d) Long Call, out of the money
In a FRA position the amount due will be paid on
a) Value date
b) Fixing date
c) Settlement date
d) Maturity date
4. You want to buy a long call option. You choose between a digital and a European Option. The options have the same parameters (strike, maturity, underlying). For which option do you have to pay the higher premium?
a) Digital (binary) option
b) European option
5. Interest rate risk:
a) Varies inversely with a bank’s GAP
b) Can be measured by the volatility of a bank’s net interest income given changes in the level of interest rates.
c) Can be eliminated by matching fixed rate assets with variable rate liabilities.
d) Rarely has an impact on bank earnings
6. Keeping all other factors constant, banks can reduce the volatility of net interest income by:
a) Adjusting the dollar amount of rate-sensitive assets
b) Adjusting the dollar amount of fixed-rate liabilities
c) Using interest rate swaps
d) Banks can reduce volatility of net interest income by doing all of the above
7. A bank’s cumulative GAP:
a) Is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities
b) Is defined as the dollar amount of earnings assets divided by the dollar amount of total liabilities
c) Compares rate-sensitive assets with rate-sensitive liabilities across all time buckets
d) Compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket
e) Compares the dollar amount of earning assets times the average liability interest rate
8. Which of the following will cause a bank’s 1-year cumulative GAP to decrease, everything else the same?
a) An increase in 3-month loans and an offsetting increase in 9-month loans
b) A decrease in 6-month loans and an offsetting increase in 2-year CDs
c) An increase in 9-month CDs and an offsetting increase in 5-ywar CDs
9. If a bank has a negative GAP, a decrease in interest rates will cause interest income to _________, interest expense to _________, and net interest income to _______________.
a) Increase, increase, increase
b) Increase, decrease, increase
c) Increase, increase, decrease
d) Decrease, decrease, decrease
e) Decrease, decrease, increase
10. If rate-sensitive assets equal $ 500 million and rate-sensitive liabilities equal $ 400 million, what is the expected change in net interest income if rates fall by 1%?
a) Net interest income will increase by $ 1 million
b) Net interest income will fall by $ 1 million
c) Net interest income will increase by $ 10 million
d) Net interest income will fall by $ 10 million
e) Net interest income will be unchanged
11. A shift from core deposits to non-core deposits will:
a) Always increase the amount of fixed rate assets
b) Always increase the amount of rate-sensitive assets
c) Generally increase the amount of non-earning assets
d) Generally reduce net interest income
12. The GAP ratio
a) Is always greater than one for bank’s with a negative periodic GAP
b) Is equal to the volume of rate-sensitive liabilities times the volume of rate-sensitive assets
c) Is equal to the volume of rate-sensitive assets divided by the volume of rate-sensitive assets
d) Is equal to the volume of rate-sensitive assets divided by the volume of rate-sensitive liabilities
e) Is always less than one for bank’s with a positive cumulative GAP
13. Earnings sensitivity analysis considers:
a) Changes in interest rates
b) Changes in the volume of rate-sensitive assets due to a change in interest rates
c) Changes in the volume of fixed-rate liabilities due to a change in interest rates
d) Mortgage prepayments
14. If a bank expects interest rates to decrease in the coming year, it should:
a) Increase its GAP
b) Issue long-term subordinate debt today
c) Increase the rates paid on long-term deposits
d) Issue more variable rate loans
e) Become more liability sensitive
15. Non-earning assets are classified as rate-sensitive assets for GAP analysis purposes.
a) True
b) False
16. Periodic GAP analysis compares rate-sensitive assets and rate-sensitive liabilities across each single “time bucket”.
17. A bond has a Macaulay’s duration of 10.7 years. If rates fall from 7% to 6%, the bonds price will:
a) Increase by approximately 1%
b) Decrease by approximately 1%
c) Increase by approximately 10%
d) Decrease by approximately 10%
e) Not enough information is given to answer the question
18. A 20-year zero coupon bond with a face value of $ 1,000 is currently selling for $ 214.55. Using the bond’s modified duration, what is the approximate change in the price of the bond if interest rates rise by 25 basis points?
a) 49.63%
b) 46.39%
c) 4.96%
d) 4.63%
19. Which of the following is true regarding duration gap analysis?
a) The magnitude of the duration gap is related to the amount of interest rate risk a bank is subject to
b) Management can adjust the duration gap to speculate on future interest rate changes
c) A positive duration gap means a bank’s market value of equity will decrease with an increase in interest rates
20. Which of the following would generally be considered price sensitive?
a) Fed funds purchased
b) Fed funds sold
c) Repurchase agreements
d) Demand deposits
e) A 20-year zero coupon bond
21. Put the following steps in duration gap analysis in the proper order. I. Estimate the economic value of assets, liabilities and equity II. Forecast the change in the economic value of equity for various interest rates III. Forecast future interest rates IV. Estimate the duration of assets and liabilities
a) III, I, IV, II
b) I, II, III, IV
c) III, IV, I, II
d) IV, I, II, III
e) II, IV, I, III
Use the following bank information for questions 23-27.
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 150 Time Deposits $ 500 4% 1,25 Loans $ 675 10% 2,5 CDs $ 400 6% 3 T-bonds $ 172 5% 5 Equity $ 100 Total $ 1.000 $ 1.000
22. What is the weighted average duration of assets?
a) 2,56 years
b) 3,75 years
c) 4,85 years
d) 5,00 years
e) 7,50 years
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 150 Time Deposits $ 500 4% 1,25 Loans $ 675 10% 2,5 CDs $ 400 6% 3 T-bonds $ 172 5% 5 Equity $ 100 Total $ 1.000 $ 1.000 23. What is the bank’s duration gap?
a) 0,53
b) 0,73
c) 0,91
d) 2,03
e) 4,58
24. What is the bank’s weighted average cost of liabilities?
a) $ 44
b) $ 76
c) $ 80
d) $ 94
e) $ 102
25. What is the bank’s expected economic net interest income?
a) $ 14,75
b) $ 32,25
c) $ 44,00
d) $ 76,25
e) $ 120,25
26. Interest rates rise by 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?
a) - $ 2,56
b) + $ 5,84
c) - $ 5,84
d) + $ 6,85
e) - $ 6,85
27. For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) __________ in the economic value of liabilities, and a(n) ____________ in the economic value of equity.
a) Increase, decrease, increase
b) Increase, increase, decrease
c) Increase, increase, increase
d) Decrease, decrease, increase
e) Decrease, decrease, decrease
28. If the yield curve is inverted, a portfolio manager can take advantage of this by:
a) Pricing more deposits on a fixed-rate basis
b) Buying more ling-term securities
c) Making variable-rate, callable loans
d) Increasing the number of rate-sensitive assets
29. A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NEW accounts that pay 4%. The bank will benefit if:
a) The 2-year rate in one year is less than 5%
b) The 1-year rate in one year is less than 6%
c) The 1-year rate in one year is greater than 6%
d) The 2-year rate in one year is greater than 6%
e) Not enough information is given to determine the correct answer
30. A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of -1,5.
31. The yield curve is typically inverted at the peak of the business cycle.
32. The duration of a liability that does not pay interest must be equal to 0.
33. A long position in a FRA 3x9 is equivalent to the following positions in the spot market:
a) Borrowing money in 3 months to finance a 9 months investment
b) Borrowing in 9 months to finance a 3 month investment
c) Borrowing half a loan amount at 3 months and the remainder at 9 months
d) Borrowing in 3 months to finance a 9 month investment
34. A portfolio manager wants to hedge his bond portfolio against changes in interest rates. He intends to buy a put option with a strike price below the portfolio’s current price in order to protect against rising interest rates. He also wants to sell a call option with a strike price above the portfolio’s current price in order to reduce the cost of buying the put option. What strategy is the manager using?
a) Bear Spread
b) Strangle
c) Collar
d) Straddle
35. Sylvia, a portfolio manager, established a Yankee bond portfolio. However, she wants to hedge the credit and interest risk of her portfolio- Which of the following derivatives will best fit Sylvia’s needs?
a) Total Return Swap
b) Credit Default Swap
c) Credit Spread Option
d) Currency Swap
36. The option sensitivity Vega is the highest in which position?
a) Long Put, at the money, short term maturity
b) Short Call, out of the money, short term maturity
c) Short Put, in the money, short term maturity
d) Long Call, at the money, long term maturity
37. You are given the following information about an interest rate swap: 2 year term, annual payment, fixed rate = 6%, floating rate = LIBOR + 50 basis points, notional principal USD 10 million, fixing in advance. Calculate the net coupon exchange for the first period if LIBOR is 5% at the beginning of the period and 5.5% at the end of the period:
a) Fixed rate payer pays USD 0
b) Fixed rate payer pays USD 50,000
c) Fixed rate payer pays USD 100,000
d) Fixed rate payer receives USD 50,000
38. Which of the following statements is false?
a) European styled call and put options are most affected by changes in Vega when they are at-the-money
b) The delta of a European styled put option on an underlying stock would move towards zero as the price of the underlying stock rises
c) The gamma of an at-the-money European styled option tend to increase as the remaining maturity of the option decreases
d) Compared to an at-the-money European styled call option, an out-of-the-money European option with the same strike price and remaining maturity would have a greater negative value for theta
39. Calculate the amount due of the following FRA: 6/12 FRA purchase, FRA rate = 4%, LIBOR at fixing date = 4.5%, days of FRA (interest period) 181, 360 days a year. What is the closest result?
a) -251,389
b) 251,389
c) -245,827
d) 245,827
40. All else being equal, which of the following options would cost more than plain vanilla options?
a) Lookback options
b) Barrier options
c) Asian options
d) Chooser options
41. Given the following portfolio of bonds:
Bond Price amount held modified Duration A 101,43 $ 3 mio 2,36 B 84,89 $ 5 mio 4,13 C 121,87 $ 8 mio 6,27 What is the value of the portfolio’s DV01 (Dollar value of 1 basis point)?
a) 8,019
b) 8,294
c) 8,584
d) 8,813
42. Which of the following IBM options has the highest gamma with the current market price of IBM common stock at USD 68?
a) Call option expiring in 10 days with strike USD 70
b) Call option expiring in 10 days with strike USD 50
c) Put option expiring in 10 days with strike USD 50
d) Put option expiring in 2 months with strike USD 70
43. The rate of change of duration with respect to the underlying yield of a fixed income bond is called:
a) Convexity
b) Delta
c) Theta
d) DVBP
44. Which of the following statements is correct when comparing the differences between an interest rate swap and a currency swap?
a) At maturity, there is no exchange of principal between the counterparties in interest rate swaps and there is an exchange of principal in currency swap transactions
b) At maturity, there is no exchange of principal between the counterparties in currency swaps and there is an exchange of principal in interest rate swap transactions
c) The counterparties in an interest rate swap need to consider fluctuations in exchange rates, while currency swap counterparties are only exposed to less fluctuation in interest rates.
d) Currency swap counterparties are exposed to less counterparty credit risk due to the offsetting effect of currency risk and interest rate risk embedded within the transaction
45. The payoff to a swap where the investor receives fixed and pays floating can be replicated by all of the following except:
a) A short position in a portfolio of FRAs
b) A long position in a fixed rate bond and a short position in a floating rate bond
c) A short position in an interest rate cap and a long position in an interest rate
d) A long position in a floating rate note and a short position in an inters rate
46. Consider a 2-year- 6% semi-annual coupon bond currently yielding 5.2% on a bond equivalent basis. If the Macaulay Duration of the bond is 1,92 years, its Modified Duration is closest to:
a) 1,97 years
b) 1,78 years
c) 1,87 years
d) 2,04 years
47. Which of the following divisions of a large multi-national bank would typically have the highest market risk?
a) Treasury management
b) Private banking
c) Retail brokerage
48. A manager wants to swap a bond for a bond with the same price but higher duration. Which of the following bond characteristics would be associated with a higher duration?
a) A higher coupon rate
b) More frequent coupon payments
c) A longer term to maturity
d) A lower yield
49. What are the parameters for calculating the Macaulay duration of consol bond?
a) Maturity
b) Market yield
c) Coupon
51. if a bond is selling at a discount, then
a) The yield to maturity is less than the coupon rate
b) The yield to maturity is greater than the coupon rate
c) The yield to maturity is equal to the coupon rate
d) Its duration must be greater than its maturity
e) Its duration must be equal to its maturity
52. If you invest $ 700 today and another $ 1,000 in two years, to the nearest dollar, how much will your investment be worth in seven years. Assume an 8.4% annual compound return.
a) $ 616
b) $ 749
c) $ 1,364
d) $ 2,278
e) None of the above
53. At what annual interest rate will you double your money if you invest for 8 years?
a) 10.11%
b) 9.05%
c) 8.19%
d) 7.91%
e) 6.73%
54. What is the effective annual cost of a credit card that charges 18% compounded monthly?
a) 16.63%
b) 18.00%
c) 18.81%
d) 19.56%
e) 19.61%
55. A bond with a par value of $ 1,000 and a 10% semi-annual coupon rate has 9 years to maturity. Assuming it is priced to yield 8%, compounded semi-annually, what is the market price of the bond, to the nearest dollar?
a) $ 1,074
b) $ 1,127
c) $ 1,450
d) $ 1,510
56. You purchase a 10-year bond at face value for $ 1,000. It pays a semi-annual coupon payment of $ 50. If you can reinvest the coupon payments at 8% annually, what is your expected total return?
a) 5.73%
b) 6.63%
c) 7.53%
d) 8.43%
e) 9.33%
57. Duration:
a) Is always greater than maturity
b) Rises as the coupon payment rises
c) Measures how bond prices change with changes in maturity
d) Is a measure of total return
e) Is a measure of how price sensitive a bond is to changes in interest rates
58. The Macaulay’s Duration of a 10-year, 10% bond with a face value of $ 1,000 and a market rate of 8%, compounded annually is:
a) 10 years
b) 11 years
c) 12 years
d) 13 years
59. What is the Macaulay’s duration of a 10 year zero-coupon bond with a face value if $ 1,000 and a market rate of 8%, compounded annually is:
b) 9,3 years
c) 8,7 years
d) 7 years
60. A bond that has an annual coupon rate of 15% has two years to maturity. If the current discount rate is 8%, what is the bond’s Macaulay’s duration?
a) 2 years
b) 1,99 years
c) 1,88 years
d) 1,77 years
e) 1,66 years
61. A bond that with a 12% coupon rate (paid semi-annually) has two years to maturity. If the current discount rate is 10%, what is the bond’s Macaulay’s duration?
a) 4 years
b) 3,47 years
c) 2 years
d) 1,73 years
e) 1,5 years
62. Which of the following is false?
a) As interest rates rise, bond prices rise, everything else the same
b) Given an absolute change in interest rates, the percentage increase in a bond’s price will be greater than the percentage decrease, everything else the same
c) Long-term bonds change proportionately more in price than short-term bonds for a given rate change, everything else the same
d) A bond with a lower coupon will change more in price than a bond with a higher coupon, everything else the same
e) A bond’s duration is a measure of its price elasticity
63. Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?
a) A 25-year 11% coupon bond
b) A 25-year 7.5% coupon bond
c) A 25-year zero-coupon bond
d) A 3-year zero coupon bond
e) A 3-year bond with a 7.5% coupon
64. A 90-day Treasury bill is quoted as having a 6% bond equivalent yield. What is the effective annual yield`
a) 6.00%
b) 6.14%
c) 6.23%
d) 6.62%
e) 6.79%
65. For a given absolute change in interest rates, the percentage increase in an option free bond’s price will be less than the percentage decrease.
66. The greater the compounding frequency, the higher the present value, everything else the same.
67. Interest rate risk:
b) Can be measured by the volatility of a bank’s net interest income given changes in the level of interest rates
c) Can be eliminated by matching fixed rate assets with variable rate liabilities
68. Keeping all other factors constant, banks can reduce the volatility of net interest income by:
d) Bank can reduce volatility of net interest income by doing all of the above
69. A bank’s periodic GAP:
b) Is defined as the dollar amount of earning assets divided by the dollar amount of total liabilities
e) Compares the dollar amount of earning assets times the average liability rate
70. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments. What dollar amount of the loan would be considered rate sensitive in the 0-90 day bucket?
a) $ 0
b) $ 250,000
c) $ 500,000
d) $ 750,000
e) $ 1,000,000
71. If a bank has a positive GAP, an increase in interest rates will cause interest income to _______, interest expense to _________, and net interest income to _____________.
e) Decrease, increase, increase
72. If a bank has a negative GAP, a decrease in interest rates will cause interest income to ___________, interest expense to __________, and net interest income to _____________.
73. An asset would normally be classified as rate-sensitive if:
a) It matures during the examined time period
b) It represents a partial principal payment
c) The outstanding principal on a loan can be re-priced when the base rate changes
74. Which of the following does affect net interest income?
a) Changes in the level of interest rates
b) Changes in the volume of earning assets
c) Changes in the portfolio mix of earning assets
d) The yield curve changing from upward sloping to inverted
75. If rate-sensitive assets equal $ 600 million and rate-sensitive equals $ 800 million, what is the expected change in net interest income if rates increase by 1%?
a) Net interest income will increase by $ 2 million
b) Net interest income will fall by $ 2 million
c) Net interest income will increase by $ 20 million
d) Net interest income will fall by $ 20 million
76. A bank’s cumulative GAP will always be:
a) Greater than the periodic GAP
b) Less than the periodic GAP
c) Positive
d) Negative
e) The sum of the interim periodic GAPs
77. Which of the following is an advantage of static GAP analysis?
a) Static GAP analysis considers the time value of money
b) Static GAP analysis indicates the specific balance sheet items that are responsible for the interest rate risk
c) Static GAP analysis considers the cumulative impact of interest rate changes on the bank’s position
d) Static GAP analysis considers the embedded options in loans, such as mortgage prepayments
78. A bank has $ 100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $ 10 million. Interest rates are expected to increase by 2%. If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income.
a) $ 2 million
b) $ 12 million
c) $ 15 million
d) $ 50 million
e) $ 62,5 million
79. Earnings sensitivity analysis differs from static GAP analysis by:
a) Looking at a wide range of interest rate environments
b) Using perfect interest rate forecasts
c) Calculating a change in net interest income given a change in interest rates
d) Earnings sensitivity analysis differs from static GAP analysis in all of the above ways
e) Earnings sensitivity analysis and static GAP analysis do not differ. They are different names for the exact same analysis
80. Which of the following does have an embedded option?
a) A callable Federal Home Loan Bank bond
b) Demand deposit accounts
c) A home mortgage loan
d) An auto loan
81. Income statement GAP considers:
c) Changes in the volume of fix-rate liabilities due to a change in interest rates
d) Mortgage payments
82. The earnings change ratio:
a) Is defined as yield on rate-sensitive liabilities divided by the yield on rate-sensitive assets
b) Measures how the yield on an asset is assumed to change given a 1% change in some base rate
c) Measures the change in net interest income for a given change in some base rate
83. To decrease asset sensitivity, a bank can:
a) Buy longer-term securities
b) Pay premiums on subordinated debt
c) Shorten loan maturities
d) Make fewer fixed rate loans
84. Which of the following are sources of a bond’s total return?
a) Coupon interest
b) Reinvestment income
c) Capital gains or losses realized at maturity
85. All other things the same, low coupon bonds have greater relative price volatility than high coupon bonds.
86. There is an inverse relationship between a bond’s duration and its price volatility.
87. The greater the compounding frequency, the higher the future value, everything else the same.
88. What type of GAP analysis directly measures a bank’s net interest sensitivity through the last day of the analysis period?
a) Earnings
b) Net Income
c) Maturity
d) Periodic
e) Cumulative
89. Which of the following are likely to occur when interest rates rise sharply?
a) Fixed-rate loans are pre-paid
b) Bonds are called
c) Deposits are withdrawn early
90. Earnings-at-risk:
a) Considers only interest rate “shocks”
b) Is only an effective measure for 90 day intervals or less
c) Examines the change in asset composition, given a change in bank liabilities
d) Examines the variation in net interest income associated with various changes in interest rates
91. To decrease liability sensitivity, a bank can:
b) Attract more non-core deposits
c) Increase the number of floating rate loans
d) Pay premiums on longer-term deposits
92. GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities.
93. A GAP ratio of less than one is consistent with a negative gap.
94. Income statement GAP is also known as Omega GAP.
95. To perfectly immunize a bank’s economic value of equity from changes in interest rate risk, it should:
a) Adjust assets and liabilities such that its duration gap is equal to one
b) Adjust assets and liabilities such that its duration gap is greater than zero
c) Adjust assets and liabilities such that its duration gap is equal to zero
d) Adjust assets and liabilities such that its GAP is equal to zero
e) Adjust assets and liabilities such that its GAP is less than one
96. Which of the following will affect a bank’s duration estimate for the year?
a) Prepayments on loans that exceed expectations
b) A 20-year corporate bond that is unexpectedly called in 6 months
c) Certificates of deposit that are withdrawn early
d) Holding a 30-year Treasury bond until maturity
97. An asset that is rate-sensitive is generally not price sensitive.
98. A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of -1,5.
99. Duration of equity measures the dollar change in EVE with a 1% change in interest rates.
100. The option sensitivity Delta is the highest in which position?
101. A 20-year zero-coupon bond with face value of $ 1,000 is currently selling for $ 214,55. Using the bond’s modified duration, what is the approximate change in the price of the bond if interest rates rise by 25 basis points?
a) – 49.63%
b) – 46.39%
c) – 4.96%
d) – 4.63%
102. VAR analyses should be completed by stress-testing because stress testing
a) Provides a maximum loss, expressed in dollars
b) Summarizes the expected loss over a target horizon with a minimum confidence interval
c) Assesses the behavior of a portfolio at a 99% confidence level
d) Identifies losses that go beyond the normal losses measured by VAR
103. Stress testing: which statement is true?
a) It is used to evaluate the potential impact on portfolio values of unlikely, although plausible events or movements in a set of financial variables
b) It is a risk management tool that directly compares predicted results to observed actual results. Predicted values are also compared with historical data
104. The option sensitivity Theta is the highest in which position?
b) Short Call, at the money
d) Long Call, at the money
105. An interest rate cap runs for 12 months based on 3 month LIBOR with a strike price of 4%. Which of the following is generally true?
a) The cap consist of 3 caplet options with maturities of 3 months, these are based on 3 month LIBOR set in advance and paid in arrears
b) The cap consist of 4 caplets starting today, based on LIBOR set in advance and paid in arrears
c) The implied volatility of each caplet will be identical no matter how the yield curve moves
d) Rate caps have only a single option based on the maturity of the structure
106. The hedge against future, unanticipated, and significant increases in borrowing rates, which of the following alternatives offers greatest flexibility for the borrower?
a) Interest rate collar
b) Fixed for floating swap
c) Call swaption
d) Interest rate floor
107. Suppose the price for a six month S&P index future contract is 552,3. If the risk-free interest rate is 7.5% per year and the dividend yield on the stock index is 4.2% per year and the market is complete and there is no arbitrage, what is the price of the index today?
a) 543,26
b) 552,11
c) 555,78
d) 560,02
108. When the maturity of a plain coupon bond increases, its duration increases
a) Indefinitely and regularly
b) Indefinitely and progressively
c) In a way independent on the bond being priced above or below par
d) Up to a certain level
109. Suppose the face value of a three year plain coupon bond is € 1,000 and the annual coupon is 10%. The current yield to maturity is 5%. What is the modified duration if this bond?
a) 2,38
b) 2,49
c) 2,62
d) 2,75
110. Bond portfolio A has the following composition: Corporate Bond Basket: price € 90,000, modified duration 2,5, long position in 8 bonds Government Bond Basket: price € 110,000, modified duration 3, short position in 6 bonds Cat Bond Basket: price € 120,000, modified duration 3,3, long position in 12 bonds All interest rates are 10%. If the rates rise by 25 basis points, then the bond portfolio A value will
a) Decrease by 23,463 €
b) Decrease by 21,330 €
c) Decrease by 12,573 €
d) Decrease by 11,430 €
111. Which of the following is the riskiest form of speculation using option contracts?
a) Setting up a spread using call options
b) Buying put options
c) Writing naked call options
d) Writing naked put options
112. Consider a forward contract on a stock market index. Identify the false statement. Everything else being constant.
a) The forward price depends directly upon the level of the stock market index
b) The forward price will fall if underlying stocks increase the level of dividend payments over the life of the contract
c) The forward price will rise if time to maturity is increased
d) The forward price will fall if the interest rate is raised
113. Which one of the following statements is incorrect regarding the margining of exchange traded future contracts?
a) Day trades and spread transactions require lower margin
b) If an investor fails to deposit variation margin in a timely manner the positions may be liquidated by the carrying broker
c) Initial margin is the amount of money that must be deposited when a futures contract is opened
d) A margin call will be issued only if the investor’s margin account balance becomes negative
114. The risk report of XYZ bank states the monthly VAR of XYZ banks is € 10 million at 95% confidence level. What is the proper interpretation of this statement?
a) If we collect 100 monthly gain/loss data of XYZ bank, we will always see 5 month with losses larger than 10 million
b) There is a 95% probability that the bank will lose less than 10 million
c) There is a 5% probability that the bank will gain less than 10 million each month
d) There is a 5% probability that the bank will lose less than 10 million each month
115. Based on a 90% confidence level, how many exceptions in backtesting a VAR would be expected over a 250 day trading year?
a) 50
b) 25
c) 15
d) 10
116. Given the following 30 ordered percentage returns of an asset, calculate the VAR and expected shortfall (=CVAR) at a 90% confidence level: -16, -14, -7, -7, -5, -4, -4, -4, -3, -1, -1, 0, 0, 0, 1, 2, 2, 4, 6, 7, 8, 9, 11, 12, 12, 14, 18, 21, 23
a) VAR = 10, CVAR = 15
b) VAR = 10, CVAR = 14
c) VAR = 14, CVAR = 15
d) VAR = 14, CVAR = 16
e) VAR = 18, CVAR = 22
f) VAR = 18, CVAR = 23
117. The VAR on a portfolio using a 1 day horizon is € 100 million. The VAR using a 10 day horizon is
a) € 316 million if returns are not independently and identically distributed
b) € 316 million if returns are independently and identically distributed
c) € 1.000 million if returns are not independently and identically distributed
d) € 1.000 million if returns are independently and identically distributed
e) € 31,6 million if returns are not independently and identically distributed
f) € 31,6 million if returns are independently and identically distributed
118. A treasury bond has a coupon rate of 6% p.a. semiannually paid and a semiannually compounded yield of 4% p.a. The bond matures in 18 months and the next coupon will be paid 6 months from now. Which number below is the closest to the Macaulay duration?
a) 1,023 years
b) 1,457 years
c) 1,500 years
d) 2,915 years
119. A and B are two perpetual bonds. A has a coupon of 4% and B has a coupon of 8%. Assuming that both are trading at the same yield, what can be said about the duration of these bonds?
a) The duration of A is greater than the duration of B
b) The duration of A is less than the duration of B
c) A and B both have the same duration
d) None of the above
120. Which of the following statements are true?
a) The convexity of a 10 year zero bond is higher than the convexity of a 10 year 6% bond
b) The convexity of a 10 year zero bond is higher than the convexity of a 6% bond with a duration of 10 years
c) Convexity grows proportionately with the maturity of the bond
d) Convexity is always positive for all types of bonds
e) Convexity is always positive for straight bonds
121. Which type of option produces discontinuous payoff profiles, meaning that the payoff can jump suddenly as the underlying asset price changes?
a) Chooser options
c) Binary options
d) Look back options
122. Given the same underlying asset and basis, which of the following yields the highest positive delta?
a) A long position in an at the money call option with a long time to expiration
b) A long position in a futures contract
c) A short position in an at the money put option with a long time to expiration
d) Cannot be determined
123. A European digital option is due to expire tomorrow. The underlying asset is trading at a price that is very close to the strike of the digital. Which of the following risks does the trader find most difficult to manage?
a) Vega and Delta
b) Rho and Gamma
c) Delta and Gamma
d) In this case, there are no risks that the trader finds difficult to manage
124. Which of the following strategies is the most appropriate strategy to implement if the investor expects a large move in a stock price but is not sure of the direction of the move?
a) Purchase a straddle
b) Write a straddle
c) Go long a butterfly spread by buying two call options, one at a relative low strike price and one at a relatively high strike price, and by selling two call options with strike prices between the strike prices of the first two call options
d) Go long a bull spread
125. A portfolio manager wants to hedge his bond portfolio against changes in interest rates. He intends to buy a put option with a strike price below the portfolio’s current price in order to protect against rising interest rates. He also wants to sell a call option with a strike price above the portfolio’s current price in order to reduce the cost of buying the put option. What strategy is the manager using?
a) Bear spread
c) Straddle
d) Collar
126. Assuming other things constant, bonds of equal maturity will still have different DV01 per USD 100 Face Value. Their DV01 per UDS 100 Face Value will be in the following sequence of highest value to lowest value:
a) Zero coupon bonds, Par bonds, Premium bonds
b) Premium bonds, Par bonds, Zero coupon bonds
c) Premium bonds, Zero coupon bonds, Par bonds
d) Zero coupon bonds, Premium bond, Par bonds
127. A zero coupon bond with a maturity of 10 years has an annual effective yield of 10%. What is the closest value for its modified duration?
a) 9
b) 10
c) 100
d) Insufficient information
128. What is the delta of this given long call option: Time to maturity = 2 years, continuous risk free rate = 4%, N(d1)= 0,64
a) 0,36
b) -0,64
c) 0,63
d) 0,64
129. If a bond is selling at par value, then:
e) Its duration must be greater than its maturity
f) Its duration must be equal to its maturity
130. A bank quotes you a rate of 7% on a CD, compounded quarterly. What is the effective annual rate?
a) 6.79%
b) 6.81%
c) 6.87%
d) 7.13%
e) 7.19%
131. In January, you purchased a 14% semi-annual coupon bond ($1,0000 par) that had a remaining maturity of five years for $ 827,95. Six months later immediately following an interest payment, you sold the bond. At the time of the sale, interest rates were 10%. What was your return?
a) 7.1%
b) 38.2%
c) 46.4%
d) 146.4%
e) 296.3%
132. A 90-day Treasury bill is quoted as having a price of $ 987,50. What is its bond equivalent yield?
a) 5.00%
b) 5.13%
c) 5.23%
d) 5.62%
e) 5.79%
133. A stripped security:
a) Pays no interest
b) Has no par value
c) Is easier to value than a traditional bond
d) Should sell as a package of zero coupon bonds
134. A bank buys a € 10,000 Treasury bill with a maturity of 1 year. Current market rates are 8%. If interest rates rise to 8.25%, what is the approximate change in the price of the T-bill?
a) – 0.02%
b) – 0.23%
c) – 2.31%
d) – 23.15%
e) – 231.15%
135. Which of the following are sources of a bond’s total return?
136. All other things the same, low coupon bonds have greater relative price volatility than high coupon bonds.
137. There is an inverse relationship between a bond’s duration and its price volatility
138. The greater the compounding frequency, the higher the future value, everything else the same.
139. What type of GAP analysis directly measures a bank’s net interest sensitivity through the last day of the analysis period?
140. How would you rank the following bonds from the shortest to the longest duration?
Bond Number Maturity Coupon rate (p.a.) Yield (p.a.) 1 10 6% 6% 2 10 6% 6% 3 10 0% 6% 4 10 6% 5% 5 9 6% 6%
a) 5-2-1-4-3
b) 1-2-3-4-5
c) 5-4-3-1-2
d) 2-4-5-1-3
141. What is the value of the portfolio’s DV01? (par amounts are in million €)
Bond Number price par amount held Modified Duration 1 101,43 3 2,36 2 84,89 5 4,13 3 121,87 8 6,27
a) 8,0129
142. An investor enters into a short position in a gold futures contract at USD 294,20. Each future contract controls 100 troy ounces. The initial margin is USD 3200, and the maintenance margin is USD 2900. At the end of the first day, the futures price drops to USD 286,6. Which of the following is the amount of the variation margin at the end of the first day?
a) USD 0
b) UDS 34
c) UDS 334
d) UDS 760
143. Consider a bearish option strategy of buying one $ 50 strike put for $ 7, selling two $ 42 strike put’s for $ 4 each, and buying one $ 37 put for $ 2. All options have the same maturity. Calculate the final profit (P/L) per share of the strategy if the underlying is trading at $ 33 at expiration.
a) $ 1 per share
b) $ 2 per share
c) $ 3 per share
d) $ 4 per share
144. Given strictly positive interest rates, the best way to close out a long American call option position early (option written on a stock that pays no dividends) would be to
a) Exercise the call
b) Sell the call
c) Deliver the call
d) Do none of the above
145. For a bank that has a positive duration gap. An increase in interest rates will cause a(n) ______ in the economic value of assets, a(n) ____________ in the economic value of liabilities, and a(n) ___________ in the economic value of equity.
146. Duration gap analysis:
a) Applies the concept of duration to the bank’s entire balance sheet
b) Applies the concept of duration to the bank’s entire income statement
c) Applies the concept of duration to the bank’s retained earnings
d) Indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits
e) Estimates when embedded options will be exercised
147. Macaulay’s duration:
a) Is a weighted average of the time until cash flows are received
b) Is always greater than maturity
c) Is never equal to maturity
d) Directly indicates how much the price of a security will change given a change in interest rates
e) Estimates when embedded options will be used
148. Modified duration:
a) Estimates when embedded options will be used
b) Directly indicates how much the price of a security will change given a change in interest rates
c) Is always greater then maturity
d) All of the above
e) A and B
149. Effective duration:
c) Is always greater than maturity
d) Is a weighted average of the time until cash flows are received
e) All of the above
150. A bond has a Macaulay’s duration of 10,7 years. If rates fall from 7% to 6% the bond price will:
151. A bond has a Macaulay’s duration of 21 years. If rates rise from 5% to 5,5% the bonds price will:
152. A bond has a Macaulay’s duration of 26,56 years. If rates rise from 6,25% to 6,50% the bonds price will:
a) Increase by approximately 6,25%
b) Decrease by approximately 6,25%
c) Increase by approximately 6,50%
d) Decrease by approximately 6,50%
153. A 20-year zero coupon bond with a face value of $ 1,000 is currently selling for $ 214.55. Using the bond’s modified duration, what is the approximate change in the price of the bond if interest rates rise by 25 basis points?
154. A 30-year zero coupon bond with a face value of $ 10,000 is currently selling for $ 2,313.77. Using the bond’s modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?
a) – 15%
b) – 4.29%
c) – 0.43%
d) – 0.15%
155. Which of the following is likely to have a negative effective duration?
a) A high coupon, interest only mortgage-backed security that is pre-paying at a high rate
b) A low coupon US Treasury bond
c) Fed Funds purchased
e) None of the above can have a negative effective duration
156. What does a bank’s duration gap measure?
a) The duration of short-term buckets minus the duration of long-term buckets
b) The duration of the bank’s assets minus the duration of its liabilities
c) The duration of all rate-sensitive assets minus the duration of all rate-sensitive liabilities
d) The duration of the bank’s liabilities minus the duration of its assets
e) The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets
157. Which of the following is true regarding duration gap analysis?
d) All of the above are true
e) A and C
158. Which of the following is false regarding duration gap analysis?
a) Duration gap analysis does not classify assets as rate-sensitive
b) Duration gap analysis indicates the potential change in a bank’s net interest income
c) Duration gap accounts for bank leverage
d) Duration gap accounts for the present value of cash flows associated with all liabilities
e) Duration gap analysis indicates the potential change in a bank’s market value of equity
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 150 Time deposits $ 500 4% 1,25 Loans $ 675 10% 2,50 CDs $ 400 6% 3,00 T-bonds $ 175 5% 5,00 Equity $ 100 Total $ 1.000 $ 1.000
159. What is the weighted average duration of assets?
160. What is the bank’s duration gap?
161. What is the bank’s weighted average cost of liabilities?
162. What is the bank’s expected economic net interest income?
163. If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?
a) $ - 2,56
b) $ 5,84
c) $ - 5,84
d) $ 6,85
e) $ - 6,85
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 200 Time deposits $ 600 2% 1,5 Loans $ 800 8% 3,75 CDs $ 500 4,5% 3,125 T-bonds $ 250 4% 7,25 Equity $ 150 Total $ 1.250 $ 1.250
164. What is the weighted average duration of assets?
b) 3,85 years
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 200 Time deposits $ 600 2% 1,5 Loans $ 800 8% 3,75 CDs $ 500 4,5% 3,125 T-bonds $ 250 4% 7,25 Equity $ 150 Total $ 1.250 $ 1.250 165. What is the bank’s duration gap?
d) 1,88
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 200 Time deposits $ 600 2% 1,5 Loans $ 800 8% 3,75 CDs $ 500 4,5% 3,125 T-bonds $ 250 4% 7,25 Equity $ 150 Total $ 1.250 $ 1.250 166. What is the bank’s weighted average cost of liabilities?
a) $ 24,9
b) $ 34,5
c) $ 80,0
d) $ 94,3
e) $ 102,1
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 200 Time deposits $ 600 2% 1,5 Loans $ 800 8% 3,75 CDs $ 500 4,5% 3,125 T-bonds $ 250 4% 7,25 Equity $ 150 Total $ 1.250 $ 1.250 167. What is the bank’s expected economic net interest income?
a) $ 34,5
b) $ 32,3
c) $ 39,5
d) $ 44,0
e) $ 120,5
Assets Market Value Rate Duration (years) Liabilities and Equity Market Value Rate Duration (years) Cash $ 200 Time deposits $ 600 2% 1,5 Loans $ 800 8% 3,75 CDs $ 500 4,5% 3,125 T-bonds $ 250 4% 7,25 Equity $ 150 Total $ 1.250 $ 1.250 168. If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?
a) $ -2,56
c) $ -5,84
d) $ 22,19
e) $ -22,19
169. To perfectly immunize a bank’s economic value of equity from changes in interest rate risk, it should:
170. What are the weaknesses of using static GAP analysis versus duration gap analysis?
a) Static GAP ignores the time value of money
b) Static GAP ignores the cumulative impact of interest rate change on a bank’s risk profile
c) Static GAP does not proscribe the treatment of demand deposits
d) All of the above are weaknesses of using static GAP analysis versus duration gap analysis
171. An instrument that derives its value form another underlying asset is known as a(n):
a) Hedge
b) Derivative
c) Basis
d) Backdate agreement
e) Original document
