Financial Markets and Institutions
Test Bank
Course Introduction
This course provides an in-depth exploration of the structure, function, and role of financial markets and institutions within the global economy. Students will learn about the different types of financial markets including money, capital, bond, and equity markets as well as the major financial institutions such as commercial banks, investment banks, insurance companies, and pension funds. The course covers fundamental concepts like asset valuation, interest rates, risk management, and the regulatory environment. Emphasis is placed on understanding how these markets and institutions facilitate the flow of funds, contribute to economic stability, and respond to financial crises and policy changes.
Recommended Textbook
Derivatives 2nd Edition by Rangarajan Sundaram
Available Study Resources on Quizplus
32 Chapters
791 Verified Questions
791 Flashcards
Source URL: https://quizplus.com/study-set/2621 Page 2
Chapter 1: Overview
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52229
Sample Questions
Q1) Which of the following statements is true when comparing the payoffs at maturity of a long forward contract with a long position in a call option,assuming the strike price of the option is the same as the delivery price in the forward contract?
A)The maximum (i.e. ,best-case)payoff of the forward contract exceeds that of the option.
B)The minimum (i.e. ,worst-case)payoff of the forward contract exceeds that of the option.
C)The minimum payoff of the option exceeds that of the forward contract.
D)The maximum payoff of the option exceeds that of the forward contract.
Answer: C
Q2) Consider hedging an exposure with (i)a futures contract,or (ii)an option with a strike price close to the futures price.The hedge with the futures contract
A)Has more cashflow uncertainty.
B)Has no upfront cost.
C)Has non-negative payoffs.
D)Has more cashflows.
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
Page 3
Chapter 2: Futures Markets
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52230
Sample Questions
Q1) The most widely traded futures are of the following type:
A)Equity.
B)Interest rate.
C)Agricultural.
D)Commodity.
Answer: B
Q2) The cheapest-to-deliver option
A)Hurts the holder of the long position in the futures contract.
B)Improves the quality of the position hedged by the futures.
C)Makes it easy to price the futures contract.
D)Makes it easier for market players to implement short squeezes.
Answer: A
Q3) Futures contracts are more likely to be cash-settled when
A)The asset underlying the contract is too costly to deliver physically.
B)There is no "underlying" for the futures contract.
C)There are more futures contracts in notional value than the physical stock of the underlying asset.
D)The maturity date of the futures is not the last day of the month.
Answer: A
To view all questions and flashcards with answers, click on the resource link above.
Page 4
Chapter 3: Pricing Forwards and Futures I
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52231
Sample Questions
Q1) Rolling over short-dated futures contracts is the same as taking one long-dated futures contract if
A)The interest rates are constant.
B)The average change in the spot price is zero over the life of the contract.
C)There is daily mark-to-market of both the short-dated and long-dated contracts.
D)The size (notional value)of the open position in the futures does not change over the horizon of the transactions.
Answer: A
Q2) The spot price of an asset is $50.The expected return on the asset is 10% a year (in simple terms)and the standard deviation of these returns is 20%.The risk-free rate of interest is 5% a year in simple terms.Assuming no costs or benefits of carry,what is the one-year forward price of the asset?
A)$52.50
B)$55.00
C)$57.50
D)$60.00
Answer: A
To view all questions and flashcards with answers, click on the resource link above.
Page 5
Chapter 4: Pricing Forwards Futures II
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52232
Sample Questions
Q1) Using the spot and forward markets to borrow at the implied repo rate entails
A)Selling the spot asset and buying it forward.
B)Buying the spot asset and selling it forward.
C)Selling the spot today and buying it back at the then-prevailing spot price in the future.
D)Buying the spot today and selling it at the then-prevailing spot price in the future.
Q2) If the stock market index is at a level of 1,120 and the one-year forward on the index is 1,210,what is the implied repo rate in continuously-compounded terms (assuming zero dividends on the index)?
A)5.72%
B)6.52%
C)7.72%
D)8.62%
Q3) Backwardation becomes more likely when,ceteris paribus,
A)The dividend rate declines.
B)Storage costs increase.
C)Convenience yields decline.
D)Interest rates decline.
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Hedging With Futures Forwards
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52233
Sample Questions
Q1) If the futures contract used to hedge a spot position is marked-to-market daily,then the minimum-variance hedge ratio formula \(h ^ { * } = \rho \times \sigma ( \Delta S ) / \sigma ( \Delta F )\) computed ignoring daily resettlement is,in absolute terms,
A)Biased downwards.
B)Unbiased.
C)Biased upwards.
D)Biased downwards only if interest rates are nonzero.
Q2) If changes in spot and futures prices have a correlation of \(- 1\) ,then
A)The hedge ratio is \(- 1\)
B)The variance of cash flows from a hedged position under the minimum-variance hedge ratio is zero.
C)The net cash flow at maturity of the hedge is zero.
D)The standard deviation of spot price changes must equal the negative of the standard deviation of futures price changes.
Q3) Refer again to the data in Question 23.The minimum-variance hedge is a
A)Long USD/EUR forward.
B)Short USD/EUR forward.
C)Long USD/CHF forward.
D)Short USD/CHF forward.
To view all questions and flashcards with answers, click on the resource link above.
Page 7
Chapter 6: Interest-Rate Forwards Futures
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52234
Sample Questions
Q1) When you are short a position in a \(3 \times 6\) FRA,you are effectively
A)Long the three-month zero-coupon bond,and long the six-month zero-coupon bond.
B)Long the three-month zero-coupon bond,and short the six-month zero-coupon bond.
C)Short the three-month zero-coupon bond,and long the six-month zero-coupon bond.
D)Short the three-month zero-coupon bond,and short the six-month zero-coupon bond.
Q2) Ceteris paribus,as interest rates rise,which of these statements is most likely to be true?
A)The duration of bonds rises.
B)The duration of bonds falls.
C)Newly issued bonds have a higher duration than bonds issued some time ago.
D)The volatility of bonds increases.
Q3) All else being equal,a bond with a higher coupon has a duration that is ________ than that of a bond with a lower coupon.
A)greater than.
B)less than.
C)equal to.
D)undetermined in relation to.
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Options Markets
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52235
Sample Questions
Q1) If your directional view is that stock prices are going to fall,you should
A)Sell stock now.
B)Sell call options.
C)Buy put options.
D)All of the above are profitable strategies.
Q2) If you expect stock volatility to fall but have no particular view of direction,then you should
A)Sell stock now.
B)Sell call options.
C)Buy put options.
D)All of the above.
Q3) You sold a call option at strike 105 for a price of $3 and sold a put option at strike 95 for a price of $2,both options with the same maturity.In what range of stock prices at maturity will you make money or not lose (on your net payoff)?
A)90-110
B)93-102
C)95-105
D)97-108
To view all questions and flashcards with answers, click on the resource link above.
9
Chapter 8: Options: Payoffs Trading Strategies
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52236
Sample Questions
Q1) A combination of a long position in a strip and a long position in a strap for the same strike and maturity (and with similar but opposite proportions of calls and puts)is similar to:
A)A strangle position.
B)A straddle position.
C)A collar position.
D)None of the above.
Q2) A stock is currently trading at a price of 22.You observe the following prices for European call options on the stock (the strikes are in parentheses): \(C ( 20 ) = 3.25\) ,
\(C ( 22 ) = 1.95\) ,and \(C ( 24 ) = 0.40\) .You can conclude from this that
A)The 20-strike call is overvalued.
B)The 24-strike call is undervalued.
C)The prices of the calls are inconsistent with no-arbitrage.
D)The stock is mispriced.
Q3) A long position in a strangle is:
A)A short squeeze on a straddle.
B)Worth more than a straddle whose strike lies within that of the strangle.
C)Worth less than a straddle whose strike lies within that of the strangle.
D)A choke hold on someone else's throat.
To view all questions and flashcards with answers, click on the resource link above.
Page 10
Chapter 9: No-Arbitrage Restrictions
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/52237
Sample Questions
Q1) An arbitrage opportunity is any situation in which
A)Your estimated probability of a stock appreciating in price is three times that of the stock falling in price,and you hold a long position in the stock.
B)An insider trading on privileged information is able to make supernormal profits.
C)You are able to generate superior risk-adjusted returns to the market.
D)You can construct a strategy whose cash flows are non-negative at all times with at least one positive cash flow at one or more points in time.
Q2) The current price of a stock is $100.The stock pays a dividend of $2 in three months.The risk free rate of interest for all maturities in annualized and continuously-compounded terms is 2%.What is the minimum price of an at-the-money American call option on the stock with six months maturity?
A) \(- \$ 1\)
B)$0
C)$1
D)$2
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: Early-Exercise/Put-Call Parity
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52238
Sample Questions
Q1) Consider an American call option and an American put option,on the same dividend-paying stock,both for the same strike and maturity.Which of the following statements is most accurate?
A)Either both options are exercised or neither one is exercised early.
B)If the call is exercised early then the put will not be exercised early.
C)If the put is exercised early then the call will not be exercised early.
D)Both options may be exercised early.
Q2) Put-call parity is valid for
A)Stock returns that are normally distributed,that is,stock movements are symmetric,but not otherwise.
B)American calls and puts when the stock pays no dividends.
C)European calls and puts when the stock pays dividends.
D)Stocks but not for currencies.
Q3) The six-month at-the-money European call option on a stock worth $25 is priced at $5.The rate of interest is 2%.The put is priced at $7.The dividend paid at the end of three months must be
A)1.23 B)2.26 C)3.83
D)4.77
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: Option Pricing: An Introduction
Available Study Resources on Quizplus for this Chatper
26 Verified Questions
26 Flashcards
Source URL: https://quizplus.com/quiz/52239
Sample Questions
Q1) In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.If the risk-neutral probability of the stock going up is equal to 0.52,what is the one-month forward price of the stock?
A)$99.48
B)$100.40
C)$100.48
D)$100.52
Q2) In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.If an investment of a dollar at the risk-free rate returns $1.001668 after one month,what is the expected gross return of a 100-strike one-month call option under the risk-neutral probabilities?
A)1.0010
B)1.0017
C)1.0100
D)1.0167
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: Binomial Option Pricing
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/52240
Sample Questions
Q1) A stock is currently trading at $100.In each period of a binomial tree,the stock will either increase in price by a factor of \(u = 1.05\) or fall by a factor of \(d = 0.90\) .The risk-free rate per period of the binomial tree is 0.1668%,i.e. ,an investment of a dollar at the risk-free rate returns $1.001668 after one period.What is the risk-neutral probability of the stock finishing in the money on a 100-strike,two-month call option?
A)0.46
B)0.50
C)0.89
D)0.90
Q2) A stock is currently trading at $100.In each month,the stock will either increase in price by a factor of \(u = 1.05\) or fall by a factor of \(d = 0.90\) .The risk-free rate of interest per month is 0.1668% in simple terms,i.e. ,an investment of $1 at the risk-free rate returns $1.001668 after one month.What is the price of a 100-strike,two-month European put option?
A)$2.36
B)$3.36
C)$4.36
D)$5.36
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Implementing the Binomial Model
Available Study Resources on Quizplus for this Chatper
16 Verified Questions
16 Flashcards
Source URL: https://quizplus.com/quiz/52241
Sample Questions
Q1) Suppose you are modeling the price evolution of a stock on a tree using a general version of the CRR model.The stock price is stochastic (lognormal),but the rate of interest each time step may not be the same,and the time step itself may be different across periods.The following is sufficient for a binomial tree representation of the stock price process to be recombining:
A)The volatility of the stock is constant each period,and the time step and interest rate are different each period.
B)The volatility of the stock is constant each period,the time step on the tree is the same each period,and the interest rate may be different each period.
C)The volatility of the stock is constant,the time step on the tree is the different each period,and the up and down probabilities are equal.
D)The volatility of the stock is different each period,the time step on the tree is the same each period,and the interest rate is the same each period.
To view all questions and flashcards with answers, click on the resource link above.
15
Chapter 14: The Black-Scholes Model
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/52242
Sample Questions
Q1) A volatility swap is an option on the realized standard deviation of a stock's return over a defined period of time.A volatility swap may be replicated using
A)A static position in forwards and options on the stock.
B)A static position in stock,forwards and options.
C)A dynamic position in forwards and options on the stock.
D)None of the above
Q2) The Black-Scholes model differs from the binomial in that
A)The mathematics it requires is much simpler.
B)It provides closed-form solutions for option prices,so can price European options faster than the binomial model.
C)It can handle stochastic interest rates more efficiently than the binomial.
D)It was developed after the binomial model and is therefore more current.
Q3) The current price of a stock is $100.What is the Black-Scholes model price of a six-month call option at strike $101,given an interest rate of 2% and a dividend rate of 1%?
The volatility is 25%.
A)$6.30
B)$6.52
C)$6.56
D)$6.78
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Mathematics of Black-Scholes
Available Study Resources on Quizplus for this Chatper
15 Verified Questions
15 Flashcards
Source URL: https://quizplus.com/quiz/52243
Sample Questions
Q1) Given that \(d Y _ { t } = b d W _ { t }\) and \(X _ { t } = \ln \left( Y _ { t } \right)\) ,what is \(d X _ { t }\) ?
A) \(X _ { t } e ^ { b ^ { 2 } dt + Y _ { t } d W _ { t } }\)
B) \(\ln \left( X _ { t } \right) \left[ \frac { 1 } { 2 } b ^ { 2 } d t + b d W _ { t } \right]\)
C) \(- \frac { 1 } { 2 } b ^ { 2 } e ^ { 2 X _ { t } } d t + b e ^ { - x _ { t } } d W _ { t }\) )
D) \(b X _ { t } \left[ \frac { 1 } { 2 } b d t + d W _ { t } \right]\)
Q2) The Black-Scholes model is based on a posited stochastic process for stock prices,where the movements in the stock are represented mathematically by a stochastic differential equation (SDE).Which of the following statements is most valid?
A)The SDE is a differential equation that changes over time.
B)The solution to the SDE is a random function of time.
C)The solution to the SDE is a deterministic function of time.
D)The solution to the SDE is the Black-Scholes formula.
To view all questions and flashcards with answers, click on the resource link above.
17
Chapter 16: Beyond Black-Scholes
Available Study Resources on Quizplus for this Chatper
27 Verified Questions
27 Flashcards
Source URL: https://quizplus.com/quiz/52244
Sample Questions
Q1) The constant elasticity of variance (CEV)Ito process is as follows: \(d S = \mu S d t + \sigma S ^ { y } d W\) In order to mimic the leverage effect it is required that
A) \(? > 1\)
B) \(? = 1\)
C) \(0 < ? < 1\)
D) \(\gamma \leq 0\) )
Q2) A stock has a current price of $100.Assume a CRR-style jump-to-default model in which the volatility is 30%.Let the risk-neutral probability of default in three months be 10%.The 3-month risk-free rate is 2% in continuously-componded and annualized terms.What is the price of a three-month at-the-money put option on this stock in a one-period jump-to-default tree model?
A)$7.22
B)7.72
C)$11.82
D)$13.42
To view all questions and flashcards with answers, click on the resource link above.
Page 18
Chapter 17: The Option Greeks
Available Study Resources on Quizplus for this Chatper
35 Verified Questions
35 Flashcards
Source URL: https://quizplus.com/quiz/52245
Sample Questions
Q1) The absolute value of theta is highest for options
A)That are deep out-of-the-money.
B)That are near-the-money.
C)That are deep in-the-money.
D)There is not enough information to determine the answer.
Q2) You are short a put on \(A B C\) stock and have delta-hedged yourself using the stock.The delta of the put is \(- 0.71\) and the gamma of the put is \(+ 0.04\) .If the price of the underlying registers an increase of $0.50,to maintain your delta-hedge,you must
A)Sell 0.04 units of the stock.
B)Buy 0.04 units of the stock.
C)Sell 0.02 units of the stock.
D)Buy 0.02 units of the stock.
(e)None of the above.
Q3) Theta is always negative except possibly for certain
A)European calls.
B)European puts.
C)American calls.
D)American puts.
To view all questions and flashcards with answers, click on the resource link above.
Page 19
Chapter 18: Path-Independent Exotic Options
Available Study Resources on Quizplus for this Chatper
40 Verified Questions
40 Flashcards
Source URL: https://quizplus.com/quiz/52246
Sample Questions
Q1) An exotic option is
A)An option that is either A sian or Bermudan.
B)An option that is unique and not widely traded.
C)An option that is not a vanilla put or call.
D)An option where there are more than two counterparties in the deal.
Q2) You have written a put on a put,where the underlying put is written on a stock index.To delta hedge yourself you can either go the underlying put or the underlying index.
A)short;short.
B)short;long.
C)long;short.
D)long;long.
Q3) The delta of a cash-or-nothing call option is highest when the option is
A)Deep out-of-the-money.
B)At- or near-the-money.
C)Deep in-the-money.
D)25% out-of-the-money.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 19: Exotic Options II: Path-Dependent Options
Available Study Resources on Quizplus for this Chatper
33 Verified Questions
33 Flashcards
Source URL: https://quizplus.com/quiz/52247
Sample Questions
Q1) A number of companies were accused of "backdating" executive stock options in the 2000s.Backdating is the procedure by which companies chose the date on which the stock was was most favorable (i.e. ,at its lowest)to act as the putative start date of the option grant.By permitting backdating,companies were essentially giving their executives a form of a
A)Cliquet option.
B)Shout option.
C)Floating-strike lookback option.
D)Fixed-strike lookback option.
Q2) Assuming no rebates upon knock-out,a down-and-out call option is worth less than a vanilla call
A)When the knock-out barrier lies above the current stock price.
B)When the knock-out barrier lies below the current stock price.
C)When the knock-out barrier is far from the strike price.
D)Always.
Q3) An Asian option is an option where
A)The underlying is the average of the stock price for a specified period.
B)The strike price is the average of the stock price over a specified period.
C)The average can be an arithmetic or geometric average.
D)All of the above are possible in an Asian option.
To view all questions and flashcards with answers, click on the resource link above. Page 21
Chapter 20: Value at Risk
Available Study Resources on Quizplus for this Chatper
34 Verified Questions
34 Flashcards
Source URL: https://quizplus.com/quiz/52248
Sample Questions
Q1) Which of the following is not a valid statement about VaR?
A)It is not a general measure of risk but a measure of extreme risk only.
B)It is an ingredient in computing capital requirements.
C)It is a single metric comparing return performance across portfolios.
D)It is a one-sided measure of risk.
Q2) Which of the following risk measures is not translation invariant (i.e. ,does not satisfy the property that if we add a risk-free asset to a portfolio with a return of \(r\) ,the risk of the portfolio should come down by the extent of this addition)?
A)VaR.
B)Expected shortfall.
C)Kurtosis.
D)Standard deviation.
Q3) A portfolio has a current value of $1000.The annual profit \(X\) is distributed normally with mean 100 and standard deviation 100.What is the probability that the portfolio will be worth less than 800 after one year?
A)0.0014
B)0.0062
C)0.0228
D)0.1587
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: Swaps and Floating Rate Products
Available Study Resources on Quizplus for this Chatper
34 Verified Questions
34 Flashcards
Source URL: https://quizplus.com/quiz/52249
Sample Questions
Q1) A plain vanilla interest-rate swap is an agreement to exchange a series of periodic payments,one computed at a fixed rate and the other at
A)A floating rate indexed to a money-market rate in the same currency (e.g. ,Libor).
B)A floating rate linked to the return on any financial index,e.g. ,an equity index.
C)A floating rate indexed to a money-market rate in the same or a different currency.
D)A floating rate indexed to a commodity (e.g. ,gold)price.
Q2) Consider a $100 five-year zero-coupon swap to pay fixed and receive floating.The five-year spot rate is 5% expressed with semi-annual compounding.The floating leg makes payments every six months indexed to Libor.What is the final payment on the fixed leg of this swap?
A)$78
B)$100
C)$125
D)$128
To view all questions and flashcards with answers, click on the resource link above.
23
Chapter 22: Equity Swaps
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52250
Sample Questions
Q1) Consider an equity-for-Libor swap.The swap favors the party that receives the equity return and pays Libor because
A)Equity returns are on average higher than Libor returns.
B)The probability that equity markets beat the bond markets is greater than 50%.
C)Equity markets are more volatile than interest-rate markets.
D)None of the above.
Q2) An equity swap favors the party that receives the equity return and pays Libor because
A)Equity returns are on average higher than Libor returns.
B)The probability that equity markets beat the bond markets is greater than 50%.
C)Equities are less risky in the long run.
D)None of the above.
Q3) In a fixed notional equity-for-floating interest-rate swap,the theoretical fair swap spread (the spread over Libor paid by the equity return receiver)is
A)Greater than zero because equity returns are generally higher than Libor rates.
B)An increasing function of equity market volatility.
C)A decreasing function of expected equity market returns.
D)Zero.
To view all questions and flashcards with answers, click on the resource link above.
Page 24
Chapter 23: Currency and Commodity Swaps
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/52251
Sample Questions
Q1) Consider a fixed-for-floating US dollar-Korean won currency swap in which an investor pays USD floating and receiving KRW fixed.From a cash-flow perspective,the swap is equivalent to a situation in which
A)The investor has received a KRW fixed-rate loan and made a USD floating-rate loan.
B)The investor has borrowed floating-rate USD and loaned KRW fixed-rate.
C)The investor is short a USD floating rate loan and long a KRW fixed-rate borrowing.
D)The investor has entered into a back-to-back loan agreement with his counterparty with fixed rates on both loans.
Q2) The USD-EUR spot exchange rate is $1.50/ .If the two-year interest rate (in continuously-compounded and annualized terms)is 3% for the EUR and 2% for the USD,what is the two-year forward exchange rate ($/ )?
A)1.5457
B)1.5303
C)1.5151
D)1.4703
To view all questions and flashcards with answers, click on the resource link above.
Page 25
Chapter 24: Term Structure of Interest Rates: Concepts
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/52252
Sample Questions
Q1) The zero-coupon rate (zcr)is
A)The rate of return each period on a bond that pays no coupons.
B)The yield-to-maturity of a zero-coupon bond.
C)The return on the bond's appreciation excluding coupon payments.
D)Zero.
Q2) Assuming annual compounding,the prices of a one-year 4% coupon bond and a two-year 5% coupon bond are $101 and $99,respectively.The forward rate between one and two years is:
A)4.5%
B)5.0%
C)6.8%
D)8.3%
Q3) Find the yield-to-maturity of a 5% two-year bond that has a price of $102.Assume coupons are paid quarterly.
A)4.33%
B)4.44%
C)4.55%
D)4.66%
To view all questions and flashcards with answers, click on the resource link above.
Chapter 25: Estimating the Yield Curve
Available Study Resources on Quizplus for this Chatper
18 Verified Questions
18 Flashcards
Source URL: https://quizplus.com/quiz/52253
Sample Questions
Q1) One of the deficiencies of the bootstrap method is that it only returns discount functions that are on discrete dates.One approach to address this problem for cashflows that do not fall on these dates is to split them into allocations to near dates for which discount functions are available.Suppose we have discount functions \(d ( t )\) ,where \(d ( 1 ) = 0.95\) and \(d ( 2 ) = 0.90\) .Assuming continuous compounding,how will a cashflow at \(t = 1.5\) years of $100 be allocated to \(t = 1\) and \(t = 2\) years such that the present value and duration of cashflow remains the same? Assume that the forward rate between 1 and 2 years is constant.The allocation of cashflows is:
A)$48.63 at one year and $51.33 at two years.
B)$47.33 at one year and $52.63 at two years.
C)$46.19 at one year and $53.87 at two years.
D)$50 at one year and $50 at two years.
Q2) Which of the following is NOT a benefit of the spline method of estimating discount functions across a spectrum of maturities?
A)Splines allow fitting curves flexibly to a high degree of fit.
B)Splined curves are continuous.
C)Spot and forward rates obtained from splined curves are always smooth.
D)Splined curves allow fitting linear functions of maturity between knot points.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 26: Modeling Term Structure Movements
Available Study Resources on Quizplus for this Chatper
13 Verified Questions
13 Flashcards
Source URL: https://quizplus.com/quiz/52254
Sample Questions
Q1) In the Black-Scholes framework,return volatility is assumed to be constant over the life of the option.This is not theoretically appropriate for pricing options on (default-risk-free)bonds because
A)Empirically,interest rates are known to change over time,so bond volatility will change over time.
B)Even if interest rates are constant over time,the duration of the bond will change over time,and duration is a measure of volatility.
C)Constant return volatility on a zero-coupon bond is possible only if the bond price does not change over time.
D)The bond price at maturity is known for certain,so volatility must go down as maturity approaches.
Q2) "Equilibrium" models of the term-structure
A)Are general equilibrium models of all securities in the economy.
B)Are models which match observed term structure curves perfectly.
C)Include such models as Vasicek (1977)and Cox,Ingersoll,and Ross (185).
D)Are models which ensure that "disequilibrium" phenomena,such as negative interest rates,cannot occur.
To view all questions and flashcards with answers, click on the resource link above. Page 28
Chapter 27: Factor Models of the Term Structure
Available Study Resources on Quizplus for this Chatper
22 Verified Questions
22 Flashcards
Source URL: https://quizplus.com/quiz/52255
Sample Questions
Q1) In the Vasieck (1977)model,you are given that \(d r _ { t } = k \left( \theta - r _ { t } \right) d t + \sigma d W _ { t }\) where \(x = 0.5\) , \(\theta = 0.06\) , \(\sigma = 0.10\) ,and the current short rate of interest is \(r _ { 0 } = 0.08\) .What is the expected standard deviation of the short rate of interest one year hence?
A)0.08
B)0.09
C)0.10
D)0.11
Q2) In the Black-Derman-Toy (BDT)model,short rates have
A)Constant volatility for all maturities.
B)Volatility that changes by maturity of the short rate.
C)Volatility that varies by maturity and level of the short rate,i.e. ,state-dependent volatility.
D)Stochastic volatility.
Q3) In the Black-Derman-Toy (BDT)model,short rates are distributed as
A)Normal
B)Lognormal
C)Exponential
D)None of the above
To view all questions and flashcards with answers, click on the resource link above. Page 29
Chapter 28: The Heath-Jarrow-Morton Hjmand Libor
Market Model LMM
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52256
Sample Questions
Q1) The HJM model is implemented by depicting the evolution of which rates in particular?
A)Yields.
B)Zero-coupon rates.
C)Forward rates.
D)Discount functions.
Q2) Which of the following is not a valid property of the Heath-Jarrow-Morton (HJM)interest-rate framework?
A)The model may be calibrated to be consistent with any initial yield curve.
B)The tree version of the model has rates of all remaining maturities at each node of the tree.
C)The model fits volatilities of rates of all maturities.
D)The model is a one-factor model.
Q3) Swap rates in the SMM are,under the risk-neutral forward measure
A)Normal.
B)Lognormal.
C)Exponential.
D)None of the above.
To view all questions and flashcards with answers, click on the resource link above. Page 30
Chapter 29: Credit Derivative Products
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/52257
Sample Questions
Q1) Which of the following is not a property or benefit of credit derivatives?
A)In instruments subject to multiple sources of risk (such as junk bonds),they enable separating out credit risk from other risks.
B)They enable hedging out credit risk of securities that are illiquid and hard to sell.
C)They reduce the overall level of default risk in the economy.
D)They offer reference prices that make it easier to price other securities that have credit risk.
Q2) CDS settlement is not likely to be triggered by which of the following events?
A)A restructuring of the company.
B)A secondary equity offering by the company.
C)Failure to make interest payments on bonds of the company.
D)The company repudiates its debt.
Q3) A digital default swap is a contract that is distinct from a credit default swap in that
A)It pays nothing is no credit event occurs.
B)It pays a fixed amount if a credit event occurs.
C)It has a single premium upfront instead of periodic premium payments.
D)Premium payments are only due if a credit event occurs.
To view all questions and flashcards with answers, click on the resource link above.
Page 31
Chapter 30: Structural Models of Default Risk
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52258
Sample Questions
Q1) The structural model framework is a parsimonious one,yet needs to accommodate complex capital structures.Which of the following approaches is not a simplification of the complexity of the real-world situation?
A)The nested compound option model for multiple debt maturities.
B)Collapsing debt to a fixed horizon equal to all of short-term debt and a percentage of long-term debt (the KMV approach).
C)Collapsing debt to a single horizon equal to the duration of the outstanding debt of all maturities.
D)None of the above.
Q2) Given a firm value of \(V = 100\) ,debt face value of \(D = 60\) ,asset volatility of \(\sigma = 30 \%\) ,and a risk free rate of \(r = 3 \%\) ,conditional on default,the expected recovery rate in the Merton model for debt of maturity five years will be:
A)40%
B)50%
C)60%
D)70%
To view all questions and flashcards with answers, click on the resource link above.
Chapter 31: Reduced-Form Models of Default Risk
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52259
Sample Questions
Q1) The current one-year and two-year zero-coupon rates are 6% and 7%,respectively.The one-year and two-year credit spreads are 1% and 2%,respectively.If the recovery rates on this class of bonds is 40% of face value,which of the following numbers most closely approximates the forward probability of default in year 2? Assume that interest rates and yields are in continuously-compounded and annualized terms.Assume also that if default occurs in any year,the recovered amount is received at the end of that year.
A)1%
B)2%
C)5%
D)9%
Q2) If the rate of defaults per year in a set of companies is given by \[\lambda = 5\] ,what is the probability of four or more defaults in half a year?
A)0.06
B)0.12
C)0.18
D)0.24
To view all questions and flashcards with answers, click on the resource link above. Page 33
Chapter 32: Modeling Correlated Default
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/52260
Sample Questions
Q1) A CDO has three tranches,a senior tranche,mezzanine tranche,and equity tranche.Keeping the probabilities of default in the CDO collateral fixed,the value of the equity tranche increases if
A)The correlation of default across all names in the CDO increases.
B)The correlation of default across all names in the CDO decreases.
C)The credit quality of names in the CDO collateral declines.
D)The volatility of credit spreads on names in the CDO collateral increases.
Q2) A self-exciting model for defaults is one where
A)There are non-random exogenous changes in the rate at which defaults arrive.
B)The volatility of the intensity increases with the level of losses.
C)The rate at which defaults arrive increases with the level of losses.
D)Excitement from defaults is spontaneous!
Q3) Consider two firms,each of which has a distance-to-default of 2.The correlation of default of the two firms is \[\rho = 0.5\] .Assuming bivariate normality,what is the value of a $100 notional first-to-default basket option on these two firms,if the discount rate is zero?
A)$1
B)$2
C)$3
D)$4
To view all questions and flashcards with answers, click on the resource link above. Page 34