You received some advertisement material in your mail from a local bank. The bank oers you a loan of

$100,000 with an APR of 5%. However, the compounding frequency is not specified. Which of the following

is true?

A. The EAR is the same as APR.

B. The EAR can be both higher or lower than 5%.

C. The EAR cannot be 6%.

D. If you take the loan, then you need to repay $105,000 in a year.

E. None of the above.

Consider two lotteries A and B. Denote their payos as XA and XB, respectively. The payos are

uncertain, so that XA and XB are random variables. Let PA and PB be their prices. Suppose E [XA] =

E [XB], V ar (XA) > Var (XB), which of the following is NOT true:

A. It could be PA > PB if investors are risk-seeking.

B. It cannot be PA > PB if investors are risk-averse.

C. PA and PB can be the same.

D. The expected return of A is positive if E [XA] > PA.

E. If V ar (XB) = 0, then E [XB] /PB should be the gross interest rate in the economy.

Suppose market is in the semi-strong form of efficiency, which of the following cannot happen?

A. Stocks with high P/E ratios on average generate higher returns than stocks with low P/E ratios.

B. Jane overheard two lawyers talking about an upcoming M&A deal in a bar. She made a profit by placing

a trade before the deal was announced.

C. Peter started trading last year. He practices technical analysis - finding patterns in historical prices to

predict future returns. He has never lost money and has been able to generate steady profits.

D. A top hedge fund is able to consistently generate trading profits because it hires experienced traders who

are able to better interpret news and predict the trends of a number of industries than its competitor funds

in the market.

E. Mark is always able to predict to future earnings of Microsoft by reading the news.

Which of following is true?

A. We can think of the treasury bond as almost a risk-free asset because its valuation never changes until it

matures.

B. A treasury bond with coupon payments has lower duration than a zero-coupon treasury bond, assuming

that they have the same maturity and face value.

C. The duration of a treasury bond can be higher than its maturity.

D. The modified duration of a treasury bond cannot be higher than its maturity even if interest rate is

negative.

E. Bond price moves in the same direction as interest rate.

Consider a 5-year Treasury note with a coupon rate of 5%. For simplicity, assume that the coupons are

paid annually. The zero rates from year 1 to year 5 are: 5%, 4.5%, 4%, 3.5%, 3%. Which of the following is

NOT true?

A. The price of the bond is higher than its face value.

B. The yield-to-maturity of the bond is between 3% and 5%.

C. The duration of the bond is higher than 2.5 years.

D. The yield-to-maturity of the bond must be lower than 4%.

E. There is arbitrage opportunities in the economy because the yield curve is downward sloping.