Question 1

Which is the correct formula for invoice price?

Accepted Answer

A)  (settlement price/conversion factor) - accrued interest 
B)  (settlement price * conversion factor) + accrued interest 
C)  (settlement price/conversion factor) + accrued interest 
D)  (settlement price * conversion factor) - accrued interest 
A)  (settlement price/conversion factor) - accrued interest 
B)  (settlement price * conversion factor) + accrued interest 
C)  (settlement price/conversion factor) + accrued interest 
D)  (settlement price * conversion factor) - accrued interest B

Question 2

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the compounded effective annual rate?

Accepted Answer

A)  2.39% 
B)  2.89% 
C)  3.39% 
D)  3.89% 
A)  2.39% 
B)  2.89% 
C)  3.39% 
D)  3.89% B

Question 3

In a bullet immunization application, the manager seeks to get ___________ to cancel out.

Accepted Answer

A)  interest rate risk and reinvestment rate risk 
B)  interest rate risk and default risk 
C)  convenience risk and price risk 
D)  reinvestment rate risk and default risk 
A)  interest rate risk and reinvestment rate risk 
B)  interest rate risk and default risk 
C)  convenience risk and price risk 
D)  reinvestment rate risk and default risk A

Question 4

Treasury bonds

Accepted Answer

A)  are not callable 
B)  may be callable after 10 years 
C)  may be callable after 15 years 
D)  are always callable after 5 years 
A)  are not callable 
B)  may be callable after 10 years 
C)  may be callable after 15 years 
D)  are always callable after 5 years

Question 5

A T-bill futures contract calls for the delivery of

Accepted Answer

A)  $100,000 of 60 day T-bills 
B)  $100,000 of 90 day T-bills 
C)  $1 million of 60 day T-bills 
D)  $1 million of 90 day T-bills 
A)  $100,000 of 60 day T-bills 
B)  $100,000 of 90 day T-bills 
C)  $1 million of 60 day T-bills 
D)  $1 million of 90 day T-bills

Question 6

When long-term interest rates are above 6%, the cheapest to deliver bond has

Accepted Answer

A)  the highest duration 
B)  the lowest duration 
C)  duration equal to 15.0 
D)  the highest yield to maturity 
A)  the highest duration 
B)  the lowest duration 
C)  duration equal to 15.0 
D)  the highest yield to maturity

Question 7

An adjustment factor is used to convert a T-bond to a bond yielding

Accepted Answer

A)  5% 
B)  6%, a decline from the former 8% level 
C)  8%, an increase from the former 7% level 
D)  9% 
A)  5% 
B)  6%, a decline from the former 8% level 
C)  8%, an increase from the former 7% level 
D)  9%

Question 8

Suppose you are managing a bond portfolio with a current market value of $4.6 million. The bonds in this portfolio are priced at an average price of 98% of par and the duration of the portfolio is 12.62 years. If the cheapest to deliver bond for a Treasury Bond futures contract has a duration of 13.22 years, is priced at 97.5% of par, and has a conversion factor of 0.8315, what is the hedge ratio for using this Treasury Bond futures contract?

Accepted Answer

A)  1.0773 
B)  0.9373 
C)  0.8664 
D)  0.7978 
A)  1.0773 
B)  0.9373 
C)  0.8664 
D)  0.7978

Question 9

Disadvantages of immunization include all of the following except

Accepted Answer

A)  cost of being wrong 
B)  it only works for long-term investment horizons 
C)  transactions costs 
D)  it reduces the portfolio yield 
A)  cost of being wrong 
B)  it only works for long-term investment horizons 
C)  transactions costs 
D)  it reduces the portfolio yield

Question 10

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the asking bond equivalent yield?

Accepted Answer

A)  2.36% 
B)  2.86% 
C)  3.36% 
D)  3.86% 
A)  2.36% 
B)  2.86% 
C)  3.36% 
D)  3.86%

Question 11

If someone had a need to lock in a short-term interest rate, they would be most likely to

Accepted Answer

A)  buy T-bill futures 
B)  sell T-bill futures 
C)  buy T-note futures 
D)  sell T-note futures 
A)  buy T-bill futures 
B)  sell T-bill futures 
C)  buy T-note futures 
D)  sell T-note futures

Question 12

A Eurodollar is a dollar-denominated deposit

Accepted Answer

A)  outside the United States 
B)  in Europe 
C)  in Europe or Canada 
D)  in Europe, Asia, or the Pacific Basin 
A)  outside the United States 
B)  in Europe 
C)  in Europe or Canada 
D)  in Europe, Asia, or the Pacific Basin

Question 13

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the asking bank discount yield?

Accepted Answer

A)  2.3% 
B)  2.8% 
C)  3.3% 
D)  3.8% 
A)  2.3% 
B)  2.8% 
C)  3.3% 
D)  3.8%

Question 14

Banks usually make duration adjustments by

Accepted Answer

A)  altering the left side of the balance sheet 
B)  altering the right side of the balance sheet 
C)  altering both sides of the balance sheet 
D)  altering only the equity account 
A)  altering the left side of the balance sheet 
B)  altering the right side of the balance sheet 
C)  altering both sides of the balance sheet 
D)  altering only the equity account

Question 15

Immunization strategies deal mostly with

Accepted Answer

A)  credit risk 
B)  market risk 
C)  convenience risk 
D)  interest rate risk 
A)  credit risk 
B)  market risk 
C)  convenience risk 
D)  interest rate risk

Question 16

Suppose a Treasury Bill futures contract is quoted at a settlement price of 96.45 percent of par. If two months from now the futures price is quoted at 95.45 percent of par, what would be the gain or loss for a long Treasury Bill futures position over this period?

Accepted Answer

A)  -$2,550 
B)  -$2,450 
C)  $2,450 
D)  $2,550 
A)  -$2,550 
B)  -$2,450 
C)  $2,450 
D)  $2,550

Question 17

A bank's funds gap equals

Accepted Answer

A)  the extent to which asset duration exceeds liability duration 
B)  total assets minus total liabilities 
C)  total assets minus current liabilities 
D)  rate sensitive assets minus rate sensitive liabilities 
A)  the extent to which asset duration exceeds liability duration 
B)  total assets minus total liabilities 
C)  total assets minus current liabilities 
D)  rate sensitive assets minus rate sensitive liabilities

Question 18

If interest rates are expected to rise, the portfolio manager might logically

Accepted Answer

A)  raise duration 
B)  lower duration 
C)  lower average yield 
D)  lower average bond rating 
A)  raise duration 
B)  lower duration 
C)  lower average yield 
D)  lower average bond rating

Question 19

The most important intermediate term interest rate futures contract is on

Accepted Answer

A)  treasury bills 
B)  Eurodollars 
C)  treasury notes 
D)  treasury bonds 
A)  treasury bills 
B)  Eurodollars 
C)  treasury notes 
D)  treasury bonds

Question 20

Suppose a $10,000 Treasury Bill with 82 days left until maturity is quoted at an asking bank discount rate of 3.20%. What would be the price of this Treasury Bill?

Accepted Answer

A)  $9,727 
B)  $9,866 
C)  $9,927 
D)  $10,000 
A)  $9,727 
B)  $9,866 
C)  $9,927 
D)  $10,000

Exam 23: Removing Interest Rate Risk

Which is the correct formula for invoice price?

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the compounded effective annual rate?

In a bullet immunization application, the manager seeks to get ___________ to cancel out.

Treasury bonds

A T-bill futures contract calls for the delivery of

When long-term interest rates are above 6%, the cheapest to deliver bond has

An adjustment factor is used to convert a T-bond to a bond yielding

Disadvantages of immunization include all of the following except

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the asking bond equivalent yield?

If someone had a need to lock in a short-term interest rate, they would be most likely to

A Eurodollar is a dollar-denominated deposit

Suppose a $10,000 Treasury Bill with 85 days left until maturity has a selling price of $9933.89. What is the asking bank discount yield?

Banks usually make duration adjustments by

Immunization strategies deal mostly with

Suppose a Treasury Bill futures contract is quoted at a settlement price of 96.45 percent of par. If two months from now the futures price is quoted at 95.45 percent of par, what would be the gain or loss for a long Treasury Bill futures position over this period?

A bank's funds gap equals

If interest rates are expected to rise, the portfolio manager might logically

The most important intermediate term interest rate futures contract is on

Suppose a $10,000 Treasury Bill with 82 days left until maturity is quoted at an asking bank discount rate of 3.20%. What would be the price of this Treasury Bill?

The Process of Portfolio Management

Valuation, Risk, Return, and Uncertainty

Setting Portfolio Objectives

Investment Policy

The Mathematics of Diversification

Why Diversification Is a Good Idea

International Investment and Diversification

The Capital Markets and Market Efficiency

Picking the Equity Players

Equity Valuation Tools

Security Screening

Bond Pricing and Selection

The Role of Real Assets

Alternative Assets

Revision of the Equity Portfolio

Revision of the Fixed-Income Portfolio

Principles of Options and Option Pricing

Option Overwriting

Performance Evaluation

Fiduciary Duties and Responsibilities

Principles of the Futures Market

Benching the Equity Players

Integrating Derivative Assets and Portfolio Management

Contemporary Issues in Portfolio Management

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