Question 1

Which of the below statements is FALSE?

Accepted Answer

A)  The importance of being able to measure the sensitivity of an individual asset, a portfolio of assets, and a liability cannot be overemphasized. 
B)  To control interest rate risk, it is necessary to be able to measure it. 
C)  An investor with a portfolio of assets wants to be able to measure her exposure to interest rate changes in order to assess whether or not the exposure is acceptable. If it is not, she can alter the exposure. 
D)  When a duration is calculated under the assumption that the cash flows do not change when interest rates change, the resulting duration is called effective duration. 
A)  The importance of being able to measure the sensitivity of an individual asset, a portfolio of assets, and a liability cannot be overemphasized. 
B)  To control interest rate risk, it is necessary to be able to measure it. 
C)  An investor with a portfolio of assets wants to be able to measure her exposure to interest rate changes in order to assess whether or not the exposure is acceptable. If it is not, she can alter the exposure. 
D)  When a duration is calculated under the assumption that the cash flows do not change when interest rates change, the resulting duration is called effective duration.

Question 2

A useful way to think of liquidity and illiquidity, proposed by Professor James Tobin, is in terms of how much sellers stand to lose if they wish to sell immediately as against engaging in a costly and time-consuming search.

Accepted Answer

A) True 
 B)False

Question 3

Which of the below are THREE of the eleven properties of financial assets?

Accepted Answer

A)  return predictability, complexity, and tax status 
B)  convertibility, currency, liquidity 
C)  liquidity, reversibility, and cash flow 
D)  money, divisibility, and denomination 
A)  return predictability, complexity, and tax status 
B)  convertibility, currency, liquidity 
C)  liquidity, reversibility, and cash flow 
D)  money, divisibility, and denomination

Question 4

Tax rates are constant from year to year, from country to country, and even among municipal units within a country (as with state and local taxes in the United States).

Accepted Answer

A) True 
 B)False

Question 5

For two bonds with the same maturity and with the same required yield, the lower the coupon rate, the greater the price responsiveness for a given change in the required yield. This is an example of ________ affecting a bond's price sensitivity.

Accepted Answer

A)  a bond's maturity 
B)  a bond's coupon rate 
C)  a bond's principal 
D)  a change in Fed policy 
A)  a bond's maturity 
B)  a bond's coupon rate 
C)  a bond's principal 
D)  a change in Fed policy

Question 6

The larger an asset's coupon rate, the greater its price sensitivity to a change in the discount rate, other things being constant.

Accepted Answer

A) True 
 B)False

Question 7

The appropriate ________ can often be approximated as the sum of rewards for the various risks an asset poses to its buyer.

Accepted Answer

A)  reward premium 
B)  discount rate 
C)  risk premium 
D)  coupon rate 
A)  reward premium 
B)  discount rate 
C)  risk premium 
D)  coupon rate

Question 8

When we refer to changes in the required yield, it is convenient to measure a change in yield in terms of what market participants refer to as ________.

Accepted Answer

A)  a basis modification rather than a yield modification. 
B)  a yield modification rather than in terms of a basis modification. 
C)  a percentage change rather than a basis point. 
D)  a basis point rather than in terms of a percentage change. 
A)  a basis modification rather than a yield modification. 
B)  a yield modification rather than in terms of a basis modification. 
C)  a percentage change rather than a basis point. 
D)  a basis point rather than in terms of a percentage change.

Question 9

Assume that the market thinks the real rate is 2.00%, the inflation premium is 2.70%, the bond's default risk justifies a premium of 2.10%, the maturity premium is 0.50%, and the liquidity premium is 1.10%. Since the cash flows are denominated in euros, the foreign-exchange rate premium is 1.50%. What is the discount rate?

Accepted Answer

A)  8.90% 
B)  9.70% 
C)  9.90% 
D)  None of these 
A)  8.90% 
B)  9.70% 
C)  9.90% 
D)  None of these

Question 10

The term duration was first used in 1938 by Frederick Macaulay as a measure of the weighted average time to maturity of a bond.

Accepted Answer

A) True 
 B)False

Question 11

The ________, the greater the probability of the market maker ________ in excess of a stated bound between the time of buying and reselling the financial asset.

Accepted Answer

A)  greater the variability; incurring a loss 
B)  lesser the variability; incurring a loss 
C)  lesser the variability; incurring a large gain 
D)  greater the variability; incurring no loss or gain 
A)  greater the variability; incurring a loss 
B)  lesser the variability; incurring a loss 
C)  lesser the variability; incurring a large gain 
D)  greater the variability; incurring no loss or gain

Question 12

The price of a complex asset is the sum of the prices of its component parts.

Accepted Answer

A) True 
 B)False

Question 13

Suppose the cash flows for a financial asset's payment for years 1 through 5 are $80. That is, CFt = $80 for t (t = 1, ... ,5). Further assume the the discount rate is 8.00% and at the end of the five years that the financial asset will pay back $1,000 in addition to the $80. Finally, assume a broker's commission of $30 is imposed by brokers to buy or sell the financial asset and that a government entity imposes a transfer tax of $20 on each transaction. To the nearest dollar, what is the correct price for this financial asset?

Accepted Answer

A)  $912 
B)  $914 
C)  $916 
D)  $918 
A)  $912 
B)  $914 
C)  $916 
D)  $918

Question 14

Suppose the cash flows for a bond's coupon payment for years 1 through 4 are $100. That is, CFt = $100 for t (t = 1, ... ,4). Further assume the the discount rate is 9.00% and at the end of year the bond will pay back the bond's par value of $1,000. To the nearest dollar, what is the correct price for this bond?

Accepted Answer

A)  $866 
B)  $932 
C)  $1,012 
D)  $1,032 
A)  $866 
B)  $932 
C)  $1,012 
D)  $1,032

Question 15

The ________ of a financial asset to a change in the required yield will not be the same for all assets.

Accepted Answer

A)  price indifference 
B)  price insensitivity 
C)  price sensitivity 
D)  cash flow sensitivity 
A)  price indifference 
B)  price insensitivity 
C)  price sensitivity 
D)  cash flow sensitivity

Question 16

Define what we mean by "an appropriate discount rate". Describe four of the six components that make up this rate.

Accepted Answer

The appropriate discount rate, r, is the

Question 17

A fundamental principle is that a financial asset's price changes in ________.

Accepted Answer

A)  the same direction of the change in the required rate of return. 
B)  the same direction of the change in the required yield. 
C)  unknown and unpredictable ways compared to the change in the required yield. 
D)  the opposite direction of the change in the required rate of return or the required yield. 
A)  the same direction of the change in the required rate of return. 
B)  the same direction of the change in the required yield. 
C)  unknown and unpredictable ways compared to the change in the required yield. 
D)  the opposite direction of the change in the required rate of return or the required yield.

Question 18

This measure of price sensitivity is popularly referred to as ________.

Accepted Answer

A)  basis point sensitivity. 
B)  value sentiment. 
C)  duration. 
D)  saturation. 
A)  basis point sensitivity. 
B)  value sentiment. 
C)  duration. 
D)  saturation.

Question 19

Which of the below statements is TRUE?

Accepted Answer

A)  Fifty basis points are equal to one-fifth percentage point, and a yield change from 9% to 9.2% represents a 50 basis point change in yield. 
B)  One basis point is defined as 0.0001, or equivalently, 0.01%. 
C)  A yield change from 7% to 7.5% is a 0.50 basis point change. 
D)  A yield change from 6% to 8.35% is a 2,350 basis point change in yield. 
A)  Fifty basis points are equal to one-fifth percentage point, and a yield change from 9% to 9.2% represents a 50 basis point change in yield. 
B)  One basis point is defined as 0.0001, or equivalently, 0.01%. 
C)  A yield change from 7% to 7.5% is a 0.50 basis point change. 
D)  A yield change from 6% to 8.35% is a 2,350 basis point change in yield.

Question 20

________ relates to the minimum size in which a financial asset can be liquidated and exchanged for money.

Accepted Answer

A)  Reversibility 
B)  Denomination 
C)  Convertibility 
D)  Divisibility 
A)  Reversibility 
B)  Denomination 
C)  Convertibility 
D)  Divisibility

Exam 9: Properties and Pricing of Financial Assets

Which of the below statements is FALSE?

A useful way to think of liquidity and illiquidity, proposed by Professor James Tobin, is in terms of how much sellers stand to lose if they wish to sell immediately as against engaging in a costly and time-consuming search.

Which of the below are THREE of the eleven properties of financial assets?

Tax rates are constant from year to year, from country to country, and even among municipal units within a country (as with state and local taxes in the United States).

For two bonds with the same maturity and with the same required yield, the lower the coupon rate, the greater the price responsiveness for a given change in the required yield. This is an example of ________ affecting a bond's price sensitivity.

The larger an asset's coupon rate, the greater its price sensitivity to a change in the discount rate, other things being constant.

The appropriate ________ can often be approximated as the sum of rewards for the various risks an asset poses to its buyer.

When we refer to changes in the required yield, it is convenient to measure a change in yield in terms of what market participants refer to as ________.

The term duration was first used in 1938 by Frederick Macaulay as a measure of the weighted average time to maturity of a bond.

The ________, the greater the probability of the market maker ________ in excess of a stated bound between the time of buying and reselling the financial asset.

The price of a complex asset is the sum of the prices of its component parts.

The ________ of a financial asset to a change in the required yield will not be the same for all assets.

Define what we mean by "an appropriate discount rate". Describe four of the six components that make up this rate.

A fundamental principle is that a financial asset's price changes in ________.

This measure of price sensitivity is popularly referred to as ________.

Which of the below statements is TRUE?

________ relates to the minimum size in which a financial asset can be liquidated and exchanged for money.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

The , the greater the probability of the market maker in excess of a stated bound between the time of buying and reselling the financial asset.