代写FINM7405 Practice Mid-term Exam – Semester 1 2023代写Processing

FINM7405 Practice Mid-term Exam - Semester 1 2023

• This practice exam only indicates the format of the actual mid-semester exam.

• It does NOT reflect the content and level of difficulty of the actual mid-semester exam.

Instructions:

-     This is a practice paper for the mid-term.

-     The mid-term exam will cover the first five topics of FINM7405

Topic 1: Course Introduction

Topic 2 Interest Rate Risk (1)

Topic 3: Interest Rate Risk (2)

Topic 4: Futures

Topic 5: SWAP

-     You should spend 90 minutes on the practice test → about 4.5 mins each question.

-     The solutions are provided on Blackboard.

-     Please do not assume that the actual test will be similar to the practice test.

-     You are welcome to ask  us to go through these practice questions during our consultation times

Topic 1: Course Introduction

1.    What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income:

A.   The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year

B.   The trader should borrow the price of the asset, buy one unit of the asset and enter into along forward contract to buy the asset in one year

C. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into along forward contract to buy the asset in one year

D.   The trader should short the asset, invest the  proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year

If the forward price is too low relative to the spot price the trader should short the asset in the spot market and buy it in the forward market.

Topic 2 Interest Rate Risk (1)

2.    How would you describe a bond if the yield is less than the coupon rate and the price is not

greater than the face value? Select one:

A. The bond trading could be trading at a discount or at par.

B. The bond trading could be trading at a premium or at par.

C. The bond is trading at a premium.

D. The bond is trading at a discount.

3.   Assume that the current price spread on ten year bond futures is 94.50/94.54. Which one of thefollowing statements is true?

A.  If I wanted to sell ten year bond futures the yield is 5.46%

B.  The market value of the futures contract is $94.50

C.  If today Isold the contract I would benefit if the price subsequently changed to 94.00/94.04

D.  If Isold the ten year bond futures contract today with settlement in one year’s time, I would have to deliver a nine year Commonwealth Government Treasury bond to the clearing house in one year’stime.

4.   The market segmentation theory:

A.   suggests that more liquid securities will trade at higher yields than less liquid securities.

B.   explains that yield curves will be normal to compensate investors for price risk.

C.   states that an inverse yield curve reflects the market’s expectation that rates will fallin the future

D.   implies that investors are choosing between securities with different perference.

E.    None of these are correct.

5.    The following four scenarios, which is NOT an example of an interest rate exposure?

A.    Businesses that borrow using a bill facility.

B.    Financial institutions when they borrow on a floating rate and lend on a fixed rate.

C.   A fund manager that plans to roll over its money-market investment.

D.   Firms that plan to borrow in the future.

E.    All of these are examples of interest rate exposures.

Topic 3: Interest Rate Risk (2) - Bond Pricing

6.    A long-term zero coupon bond with 3-year maturity, and bond’s market yield was 8% p.a. compounded semi-annually with $100 face value, the  price of the zero  coupon  bond  is and the duration of this bond is .

A.   $79.38, 3 years

B.  $79.38, 2 years

C.  $79.03, 3 years

D.  $88.90, 1 year

E.   None of these are correct

7.    A 4% coupon-paying bond with two years’ life has a yield to maturity of 7% p.a with face value of 100 and provides semi-annual payment.

The bond’s dirty price is and clean price is under when the bond still has 20 months to maturity.

A.   $96.6825; $95.8234

B.   $94.4904; $95.8234

C.   $94.4904; $96.6825

D.   $96.6825; $95.3492

E.   None of these are correct

8.    Say the 4.50% 15 April 2020 Treasury bond is traded for settlement on 15 April 2016 at 3.50% maturity to yield. The Treasury bond will provide semi-annual payments and with $100 face value. What is the settlement price?

A. $103.673

B. $103.703

C. $96.376

D.   $96.412

E.   None of these are correct

9.    Calculating the duration of a 9% coupon, 8% yield to maturity, 4-year annual payment bond, if the coupon rate decrease and other factors remain the same, the duration for new bond will ?

A.   4.1004 years; increase

B. 3.5396 years; increase

C.    2.2989 years; decrease

D.   4.0000 years, increase

10. A step-up bond still has 2 years to maturity. The annual coupon rate for the

immediate nexttwo coupons is 6% p.a. and the annual coupon rate for the final two coupons is 8% p.a. The payment frequency of this bond is semi-annual payment, and the face value equals to 100. If the yield is 9% p.a., the bond’s fair price is . And suppose the bond is trading in the market at $102, we can construct a strategy to arbitrage from this situation because of the bond is .

A. $96.334; Overpriced

B.    $82.042; Overpriced

C.    $103.2425; Underpriced

D.   $93.242; Underpriced

11. A secured bond is a:

A. Treasury bond

B.  semi-government bond

C.  convertible bond

D. debenture

E.  floating-rate note.

Topic 4: Futures

12. A  short hedge using a futures contract is appropriate when a firm has made some forecasts regarding the price of the underlying asset. Which of the following statements is the most accurate?

A.   The price of the underlying asset will increase in the future and the firm expects to sell the underlying asset in the future.

B.   The price of the underlying asset will decrease in the future and the firm expects to purchase the underlying asset in the future.

C. The price of the underlying asset will increase in the future and the firm expects to purchase the underlying asset in the future.

D.   The price of the underlying asset will decrease in the future and the firm expects to sell the underlying asset in the future.

13. An investor purchases futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,580.

Which of the following is true:

A.   The investor has made a loss of $8,000

B. The investor has made again of $8,000

C.   The investor has made again of $4,000

D.   The investor has made a loss of $4,000

14. A personalized contract between two parties whereby one party agrees to sell a bale of wool to another party in the future at a  price determined today is an example of a:

A.   futures contract.

B.   forward contract.

C.   wool option.

D.   spot contract.

15. Calculate how much a trader, who enters into a 90-day bank bill futures contract on 20 June with a quoted price of $94.00, will need to pay on settlement date (30 June) if the face value of the underlying bill is $500 000.

A.   $497 289

B.    $499 179

C.   $492 711

D.   $500 000

16. The Treasury currently issues 10-year bonds with a 6% p.a. coupon rate paid semi-

annually with face value equals to $100,000. You have been told by Australia’s most respected (andaccurate) economic forecaster that 10-year bond yields will rise by 150 bps over the next quarter:

(1) Describe how you would use this product to benefit from the yield move.

(2) If the current quoted price of the product on the SFE is $94.50, how many contracts wouldyou have to trade to make a $251,000 profit over the next quarter?

A.   You enter a long 10-year bonds future and close-out with short 10-year bonds future; 23 contracts

B.   You enter a long 10-year bonds future and close-out with long 10-year bonds future; 23 contracts

C.   You enter a short 10-year bonds future and close-out with short 10-year bonds future; 23 contracts

D.   You enter a short 10-year bonds future and close-out with long 10-year bonds future; 23 contracts

E.    None of these are correct.

17. The difference between hedging and speculation is that:

A. hedging involves offsetting the risk posed by an underlying financial position while speculation does not

B.    hedging increases price risk while speculation does not

C.    hedgers operate in different derivative markets to speculators

D.   a hedged outcome is always preferable to a speculative outcome

E.    speculators are more risk averse thanhedger

Topic 5: SWAP

18. Which of the following is true?

A.    Principals are not usually exchanged in a currency swap

B. The principal amounts usually flow in the opposite direction to interest payments at the beginning of a currency swap and in the same direction as interest payments at the end of the swap.

C.   The principal amounts usually flow in the same direction as interest payments at the beginning of acurrency swap and in the opposite direction to interest payments at    the end of the swap.

D.   Principals are not usually specified in a currency swap

The correct answer is B. There are two principals in a currency swap, one for each currency. They flow in the opposite direction to the corresponding interest payments at the beginning of the life of the swap and in the same direction as the corresponding interest payments at the end of the life of the swap.

19. Which one of the following statements is false?

E.    A swap is an exchange traded contract to swap a fixed for floating series of cashflows

F.    A swap can be used to effectively convert a floating rate loan to a fixed rate loan

G.   A swap can be used to speculate on the future direction of long-term interest rates

H.   A swap can be used to reduce duration or to increase duration of an existing portfolio ofdebt

20. Companies A and B have been offered the rates according to the table below. Companies A and B agree to borrow in the market in which they have their comparative advantages, thenthey enter into a swap with each other on the same notional principal of $20 million  for fiveyears with annual payments. Under these swaps, Company A, Company B are all equally better off.

Fixed	Rate	Floating
RateCompany A  8.4% 0.6%		LIBOR +
Company B 7.0%		LIBOR

Which markets Companies A and B have their comparative advantages?

	Company A	Company B
I.	Floating-rate market	Floating-rate market
J.	Floating-rate market	Fixed-rate market
K.	Fixed-rate market	Fixed-rate market
L.	Fixed-rate market	Floating-rate market

21.  Under all possible swaps, which of the following statements is the most accurate?

M. Company B pays Company A a floating rate of LIBOR and receives from Company A a fixedrate of 8.0%.

N. Company A pays Company B a floating rate of LIBOR and receives from company B a fixedrate of 7.0%

O. Company A pays Company B a fixed rate of 7.4% and receives from Company B a floating rate of LIBOR

P. Need more information