1

Your investment portfolio consists of 10,000 worth of an X firm stock. Suppose that the risk-free rate is 4%.

Google stock has an expected return of 14%, and a volatility of 40%, and the market portfolio has an expected

return of 10% and a volatility of 17%. Assume that the CAPM assumptions hold. What is the expected return on

an alternative investment which has the highest possible expected return while having the same volatility as

Google? Choose the answer which is closest to your calculations.

a. 27.5%

b. 29.5%

c. 22.7%

d. 21.3%

e. 37%

2

Why is Surveillance of Credit Quality important? Choose the answer which best describes your thoughts.

a. Surveillance of Credit Quality is important because the base rate depends on it.

b. Surveillance of Credit Quality is important because it affects the market liquidity of a debt security.

c. Surveillance of Credit Quality is important and proxies upgrades or downgrades which might lead to a change in the securities

price.

d. Surveillance of Credit Quality is important and must be accurate as an upgrade or downgrade may change the average level

of equity markets.

e. Surveillance of Credit Quality is important and must be accurate as an upgrade or downgrade may change market's

perception of credit risk and lead to a change in the securities price.

3

A financial instrument currently selling for 189,653 promises to pay 458,976 in nine years from now. What is the yield for this investment? Choose the answer closest to your calculations?

a. 3.17%

b. 10.7%

c. 7.9%

d. 10.3%

e. 9.7%

4

If you can afford a 500 monthly car payment, what is the value of the car you can afford if interest rates are

12.3% per annum on a 48-month loan? Choose the answer closest to your calculations.

a. 18,057.289 b. 19,714.083 c. 18,881.196 d. 19,345.714 e. 17,965.748

5

What is the yield to maturity (YTM) for a 15 year zero coupon bond with a maturity value of 500 selling for E371?

a. 0.0501 or 5.01%

b. 0.007 or 0.7%

c. 0.015 or 1.596

d. 0.0302 or 3.02%

e. 0.0201 or 2.01%

6

Which of the following statements about the Efficient Market Hypothesis is the most correct?

a. The strong form states that prices reflect all the information in past prices. The semi strong form states that prices reflect all publicly available information. The weak form states that prices reflect all information.

b. The weak form states that prices reflect all the information in past prices. The semi-strong form states that prices reflect all stock information. The strong form states that prices reflect all public information but not private.

c. The semi-strong form states that prices should reflect all the information in past and current prices. The weak form states that prices not always reflect all publicly available information. The strong form states that prices reflect all information about the past and the present.

d. The semi-strong form states that prices reflect all the information in past prices. The weak form states that prices reflect all publicly available information. The strong form states that prices reflect all information.

e. The weak form states that prices reflect all the information in past prices. The semi-strong form states that prices reflect all publicly available information. The strong form states that prices reflect all information.

7

Which of the following statements about Motivation for Securitisation is the most correct?

a. Remove issuer's risk from assets, free up issuer's balance sheet, cheaper source of funds, package credit risk to meet the investors' appetite.

b. Remove originator risk from assets, free up originator's balance sheet, cheaper source of funds, package credit risk to meet originator's appetite.

c. Remove issuer's risk from assets, free up originator's balance sheet, cheaper source of funds, package credit risk to meet the originator's appetite.

d. Remove credit risk from assets, free up originator's balance sheet, cheaper source of funds, package risk to meet investors appetite.

e. Remove originator risk from assets, free up originator's balance sheet, cheaper source of funds, package credit risk to meet investors' appetite.

8

Answer the following numerical questions. Round up to four decimals and choose the answer closest to your

calculations. Assume a face value of 100 if required in your calculations.

(i) The price of a bond changes from 4,367.98 to 3,985.27 and the bond pays a coupon of 346.81 during the

same period. What is the rate of return?

(ii) What is the price of a bond with 10% coupon rate and 10% yield to maturity?

a. (i) 0-0.0076 or -0.76%

(ii) 1000

b. (i) 0-0.0067 or -0.6796

(ii) 1000

c. (i) -0.0082 or -0.82%

(ii) 100

d. (i) -0.0028 or -0.28%

(ii) 100

e. (i) -0.0076 or -0.76%

(ii) 100

8

Answer the following question. A 10-year 8% coupon corporate bond pays interest semi-annually. If the price of

the bond is $99.5, what is the credit spread (in basis points - BPS) if the 10-year 3% treasury bond has a price of

$101?

a. 150 BPS

b. 500 BPS

c. 300 BPS

d. 450 BPS

e. 100 BPS

9

Answer the following numerical questions. In all calculations assume a par value of 2,000 and round your final

answer up to two decimals. Choose the answer closest to your calculations.

(i) What are the Macaulay and modified duration of a 1% coupon bond making annual coupon payments if it has 3

years until maturity and a yield to maturity (YTM) of 14%?

(ii) What are the Macaulay and modified duration of a 20% coupon bond making annual coupon payments if it

has 5 years until maturity and a yield to maturity (YTM) of 5%?

a. (i) Macaulay Duration: 2.97 years, Modified Duration: 2.61

(ii) Macaulay Duration: 3.59 years, Modified Duration: 3.42

b. (i) Macaulay Duration: 2.87 years, Modified Duration: 2.74

(ii) Macaulay Duration: 3.19 years, Modified Duration: 3.05

c. (i) Macaulay Duration: 2.84 years, Modified Duration: 2.79

(ii) Macaulay Duration: 3.55 years, Modified Duration: 3.45

d. (i) Macaulay Duration: 2.76 years, Modified Duration: 2.67

(ii) Macaulay Duration: 3.49 years, Modified Duration: 3.05

e. (i) Macaulay Duration: 2.67 years, Modified Duration: 2.76

(ii) Macaulay Duration: 3.94 years, Modified Duration: 3.04

10

If you can afford a 1,500 house loan payment, what is the value of the house you can afford if interest rates are

1.12% per annum on a 360-month loan? Round your answer to the nearest integer.

a. 548,461

b. 561,854

c. 558,146

d. E458,461

e. 485,416

11

Answer the following questions.

Consider the following bonds. Bond A is a zero-coupon bond with a maturity of 5 years and a face value of 100 and

a yield to maturity of 3.5%. Bond B is a coupon bond with a maturity of 5 years, nominal value 100, which pays

interest at the rate of 5.2% with a current price of 88.82.

(i) determine the current price of the zero-coupon bond.

(ii) determine the current yield to maturity of the fixed coupon.

(iii) consider an increase in the stock's maturity by 3.5%. What would be the price of both bonds?

a. (i) 84.19; (ii) 8%; (iii) 87.14; 80.06

b. (i) 082.19: (ii) 6%; (iii) 88.95; 75.63

c. (i) 84.19: (ii) 8%; (iii) 82.27; 86.22

d. (i) 82.19: (ii) 7%, (iii) 83.14; 74.12

e. (i) 84.91: (ii) 8.3%; (iii) 89.55; 86.06

12

Answer the following numerical questions. Round up to two decimals and choose the answer closest to your

calculations. Assume a face value of 1000 if required in your calculations.

(i) What is the price of a 10-year zero-coupon bond if the annual interest rate is 3%?

(i) What is the price of a 5-year zero-coupon bond if the annual interest rate is 2% and the annual coupon rate is

3%?

a. 722.49

(ii) 1,013.76

b. 731.47

(ii) 1.078.11

c. (i) 752.66

(ii) 1.056.28

d. (i) 744.09

(ii) 1.047.13

e. (i) 724.90

(ii) 1.067.31

13

Which of the following statements about Bond Convexity is the most correct?

a. Bonds with greater curvature gain more in price when yields fall than they lose when yields rise.

b. Bonds with greater curvature gain more in price when yields increase than they lose when yields rise.

c. Bonds with greater curvature gain more in price when yields increase than they lose when yields increase

d. Bonds with lower curvature gain more in price when yields fall than they lose when yields rise.

e. Bonds with greater curvature gain less in price when yields fall than they lose when yields rise.