Question 1

A bank sells an interest rate swap to its client, with the client agreeing to pay the bank a fixed 4% and receive 3 month LIBOR + 100 basis points, payments due every quarter. After quarter 1, the 3 month LIBOR is 2% pa. Which of the following payments will happen in respect of this swap, assuming the contract notional is $100m, and the rate convention is 30/360.

Options :

A : Bank pays customer $1,000,000 and customer pays the bank $750,000

B : Bank pays customer $250,000

C : Customer pays bank $250,000

D : Bank pays customer $1,000,000

Answer: C

Question 2

An early exercise of an American call option is advisable whenever the option is deep in the money and delta approaches 1

Options :

A :

An early exercise of an American call option is advisable whenever the option is deep in the money and delta approaches 1

B :

An early exercise of an American call option may be justified if an extraordinarily large dividend payment is imminent

C :

An early exercise of an American call option is never a good idea as an option is always worth more alive than when it is dead

D : An early exercise of an American option, if ever to be done, should be done immediately after an exdividend date

Answer: B

Question 3

Callable corporate bonds:

Options :

A : generally yield less than non-callable bonds due to the call feature

B : need to be priced lower than non-callable bonds to make them attractive to investors

C : are more convex than their non-callable counterparts

D : are generally called when their prices have fallen below the issuance price

Answer: B

Question 4

Two portfolios with identical Sharpe ratios will have

Options :

A : identical expected risk

B : identical expected risk and returns

C : returns identically proportionate to risk

D : identical expected returns

Answer: C

Question 5

What is the running yield on a 6% coupon bond selling at a clean price of $96?

Options :

A : 5.70%

B : 6.25%

C : 6.30%

D : 6.00%

Answer: B

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