Fins2624-Mockterm-Paper-with-Answers

Topics: Bond, Bond duration, Bonds Pages: 19 (6053 words) Published: June 19, 2013
FINS2624 S2 2012

Mockterm

FAMILY NAME OTHER NAMES STUDENT ID SIGNATURE

THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF BANKING AND FINANCE

TIME ALLOWED: N/A

To make sure that we can identify your exam if your student ID number is hard to read, please tick the boxes below to fill in your seven digit student ID number. Detailed instructions are on the next page. 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0

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FINS2624 PORTFOLIO MANAGEMENT MOCK MID-TERM EXAMINATION - SEMESTER 2, 2012

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FINS2624 S2 2012

Mockterm

INSTRUCTIONS 1) Write your name, student ID number and signature in the assigned space on the front page. 2) To make sure that we can identify your exam if your student ID number is hard to read, please tick the boxes corresponding to your student ID number on the front page. Do this by marking the box corresponding to each of the digits in your seven digit student ID number, going from left to right. For example, my ID number is z3352704, so I would fill in the boxes as below.

1 2 3 4 5 6 7 8 9 0 3) Fill in the details requested by the generalized answer sheet.

1 2 3 4 5 6 7 8 9 0

4) This paper has two sections: Section A: 30 multiple choice questions (worth a total of 30 marks) Section B: 5 free-format problem (worth a total of 42 marks) 5) Mark your answers to the multiple choice questions of section A in the generalized answer sheet using a 2B pencil. Write down the solution of the free format problem in the answers sheets in the back. All answers and solutions must be written in ink. Pencils may not be used. 6) Notation and terminology in this exam are as defined in the lectures. 7) Assumptions that have been made throughout the lectures may be assumed throughout the exam unless otherwise stated. For instance, unless explicitly relaxed, you may assume that there are no transaction costs, that bonds have no default risk, that investors are rational, that there are no restrictions on short positions etc. 8) Total number of marks for this paper is 72. 9) This is a closed book exam. Except calculators according to the UNSW guidelines, no other means are allowed. 10) This question sheet and the generalized answer sheet must be returned in full. Do not tear the pages. 11) You must prove your identity using your student ID card when turning in the exam.

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FINS2624 S2 2012

Mockterm

FOMRULA SHEET

The price of a bond, P , is given by: P = c 1 FV 1− + T y (1 + y) (1 + y)T

where c is the dollar coupon, y is the yield-to-maturity, T is the time to maturity and F V is the face value. If X and Y are two stochastic variables and α and β are two constants then: E(X + Y ) = E(X) + E(Y ) E(αX) = αE(X) V ar(X) = Cov(X, X) Cov(X, Y ) = Cov(Y, X) Cov(X, Y ) = ρXY σX σY Cov(αX, βY ) = αβCov(X, Y ) The solution to the quadratic equation ax2 + bx + c = 0 is x1/2 = −b ± √ b2 − 4ac 2a

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FINS2624 S2 2012

Mockterm

SECTION A OF THE MOCKTERM EXAM 30 MARKS IN TOTAL THIRTY MULTIPLE CHOICE QUESTIONS

• Mark the answers in the generalized answer sheet using a 2B pencil. Or don’t, since this is a mockterm. • Each question is worth one mark and there is no negative marking.

1. Which of the following statements about bonds is true? a) A bond with a higher coupon rate must be a better investment than a bond with a lower coupon rate. b) A bond that trades at a discount must be a better investment than a bond that trades at a premium. c) A bond with a higher yield-to-maturity is a better investment than a bond with a lower yield to maturity. d) Several of the above statements are true. e) None of the above statements are true. E is correct. C is false since the yield-to-maturity, y is the constant hypothetical interest rate that solves P = c 1 FV 1− + T y (1 + y) (1 + y)T

It says nothing about whether the bond is correctly priced (which we assume it is unless we have some specific reason to...
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