PRMIA Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition - 8006 Exam Practice Test

When comparing compound interest rates to equivalent continuously compounded rates of return, the latter will always be:
Correct Answer: B
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What would be the expected return on a stock with a beta of 1.2, when the risk free rate is 3% and the broad market index is expected to earn 8%?
Correct Answer: D
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The rate of dividend on a stock goes up. What is the effect on the price of a put option on this stock?
Correct Answer: A
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[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.] Which of the following is not an approach to attempt to value to a convertible security:
Correct Answer: A
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Gamma risk can be hedged by:
Correct Answer: B
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An equity portfolio manager desires to be 'market neutral'. His portfolio is valued at $10m and has a beta of
0.7 to the broad market index. The index is currently at 1000 and an index contract multiplier is specified as
250. What should he do to make the beta of his portfolio zero?
Correct Answer: A
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Which of the following will have the effect of increasing the duration of a bond, all else remaining equal:
I. Increase in bond coupon
II. Increase in bond yield
III. Decrease in coupon frequency
IV. Increase in bond maturity
Correct Answer: C
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For a deep in-the-money option:
Correct Answer: D
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Calculate the basis point value, or PV01, of a bond with a modified duration of 5 and a price of $102.
Correct Answer: B
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Backwardation can be explained by:
Correct Answer: D
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An investor holds $1m in a 10 year bond that has a basis point value (or PV01) of 5 cents. She seeks to hedge it using a 30 year bond that has a BPV of 8 cents. How much of the 30 year bond should she buy or sell to hedge against parallel shifts in the yield curve?
Correct Answer: D
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Which of the following statements are true:
Correct Answer: C
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When hedging an equity portfolio with index futures that carry no basis risk, the number of futures contracts to hold is determined by:
Correct Answer: D
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An asset manager holds an equity portfolio valued at $25m with a beta of 0.8. She would like to reduce the beta of the portfolio to 0.6 for the next 3 months using index futures. Index futures are curently trading at
1450, and the contract multiple is 250. How should the asset manager trade the index futures to get his desired result? Assume her portfolio is well diversified.
Correct Answer: A
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The yield to maturity for a zero coupon bond is equivalent to:
Correct Answer: A
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A currency with a lower interest rate will trade:
Correct Answer: B
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