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Which of the following would be the semi-annual coupon payment (in pounds sterling) for a bond that has an annual coupon rate of 4% and a par value of £1000? A) 45 B) 90 C) 4. D) 22. Answer D à 1000*0/2 since coupon is paid every six months A bond has a 6% coupon rate (annual rate, paid semi-annuall...

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1. Which of the following would be the semi-annual coupon payment (in pounds sterling) for a bond that has an annual coupon rate of 4.5% and a par value of £1000? A) 45 B) 90 C) 4.5 D) 22.5 Answer D à 1000*0.045/2 since coupon is paid every six months 2. A bond has a 6% coupon rate (annual rate, paid semi-annually), £100 par value, exactly 4 years left till maturity and a current yield to maturity of 7% (annualised). The price of this bond would be closest to: A) £100 B) £96.80 C) £96.56 D) £98.12 Answer C à in Excel, use PV(0.035, 8, -3, -100) 3. Which of the following statements regarding callable bonds is false? A) A callable bond gives the issuer the option to buy back the bond before its original maturity date. B) All else equal, a callable bond becomes more likely to be called as the general level of interest rates fall. C) Since the call option is a valuable option held by the issuer, the yield to maturity of a callable bond would be smaller than that of an otherwise identical, straight bond. D) All else equal, a callable bond represents a greater reinvestment risk for a fixed income investor than a straight bond. Answer C à because of this value to the issuer, it has to pay a higher interest rate on a callable bond as compared to a straight bond 4. A zero-coupon bond: A) pays all of its cumulated coupons at maturity B) does not pay any coupons at all, it makes a single payment of par value at maturity C) sells at a market price that is independent of market interest rates D) increases in price if market interest rates increase Answer B à definition of a zero coupon bond 5. Measured at the same point in time, which of the rankings below is correct regarding the price risk of the following bonds by the same issuer: Bond 1: 10-year, 5% coupon straight bond Bond 2: 15-year, zero coupon straight bond Bond 3: 2-year, zero-coupon straight bond Bond 4: 5-year, floating rate bond A) 2 > 1 > 3 > 4 B) 1 > 2 > 3 > 4 C) 4 > 3 > 1 > 2 D) 4 > 3 > 2 > 1

Answer A à between bonds 1 and 2, both maturity and coupon parameters contribute to higher price risk for Bond 2, Bond 3 being only a 2-year bond has less price risk than Bond 1, Bond 4 is by definition has the least price risk since its coupon rate adjusts upwards when interest rates rise. 6. According to the pure expectations theory, what would be the market’s current expectation of the one-year rate to prevail exactly a year from now if the current yield to maturities of the two-year and one-year zero coupon bonds are 3.5% and 3%, respectively? A) 3.5% B) 3% C) 4% D) cannot be calculated without a liquidity premium assumption Answer C à 1.0352 = 1+0.03 * (1 + E[r1,1]) 7. Which of the following statements comes closest to explaining the segmented markets hypothesis regarding the term structure of interest rates? A) The hypothesis holds that bond investors have a strong preference for holding liquid securities, therefore the long end of the yield curve tends to offer higher yields than its short end. B) The hypothesis holds that bond investors only care about the expected returns that their fixed income investments provide. Therefore there is a tight linkage between the short and long ends of the yield curve. C) The hypothesis assumes that investors who typically invest in the long end of the yield curve can easily be enticed to hold short term bonds and vice versa. D) The hypothesis postulates that investors and borrowers have strong preferences for certain sections of the yield curve when they invest in fixed-income securities. These preferences lead supply and demand forces unique to each sub-section of the yield curve determining the interest rates for that sub-section. Answer D à segmented markets holds that different sections of the yield curve have their own clienteles who do not move from one section to another, e.g. an insurance company that buys long-term bonds to fulfil its insurance commitments would not shift to 6-month bills regardless of what their expectations of future interest rates might be. These different clienteles therefore determine the equilibrium rate for each section of the yield curve.

8. The yield to maturity of a bond at the time of purchasing it will equal its realised yield for an investor if: A) If all of its coupons can be reinvested at exactly the initial yield to maturity. B) If all of its coupons get reinvested at a rate that is less than the initial yield to maturity. C) If all of its coupons get reinvested at a rate that is greater than the initial yield to maturity. D) The two metrics are completely unrelated. Answer A à yield to maturity is an estimate of what rate of return will be realised

from a bond, it will equal the realised yield if all reinvestment takes place at the bond’s initial ytm, which would be a small probability occurrence.

9. Which of the following statements regarding the liquidity preference hypothesis is true? A) The hypothesis assumes that investors prefer liquidity and since longer term bonds have more price risk than short term ones, all else equal, they would want to be paid a premium to switch from a short-term, more liquid bond to a longer term, less liquid one. B) The hypothesis combines certain assumptions of the expectations hypothesis and segmented markets hypothesis. C) The hypothesis relies on assumption that the short and long ends of the yield curve being disjoint from one another in terms of their investor clienteles. D) The hypothesis is based on the assumption that investors are insensitive to price risk. Answer A à moving an investor to a less liquid investment requires paying her a liquidity premium

10. Which of the following changes, all else being equal, would reduce a bond’s price risk? A) Reducing its coupon rate B) Increasing its maturity C) Making it callable D) Getting rid of the coupon and making it a zero-coupon bond Answer C à A callable bond, while it has more reinvestment risk compared to a straight bond, would be insensitive to interest rate changes within certain yield ranges. So it would have a slightly smaller price risk at inception compared to an otherwise identical straight bond. All the other choices in the question increase price risk. 11. A mutual fund reports the following annual returns for the past 6 years: year return 2015 -0.07 2016 -0.05 2017 0.03 2018 0.07 2019 0.17 2020 0.15 The fund’s sample average return ( �) and volatility (s) for the period would be closest to: A) �= 0.06, s = 0.06 B) �= 0.05, s = 0.10 C) �= 0.05, s = 0.01 D) �= 0.05, s = 0.06 Answer B à sample mean= (sum of annual returns)/6 = 0.30/6=0.05. Sample variance = 1/(6-1)*[(-0.07-0.05)2 +(-0.05-0.05)2 +(0.03-0.05)2 +(0.07-

0.05)2 +(0.17-0.05)2 +(0.15-0.05)2 ] = 0.00992. Volatility is the square root of sample variance so sqrt(0.00992)= 0.0996=~0.10 12. Which of the following would be an example of a non-systematic risk in an equity portfolio management context? A) The CEO of a company unexpectedly deciding to retire. B) The European Central Bank making a sudden policy change regarding interest rates. C) GDP of a major economy suffering an unexpected setback for the most recent quarter. D) World trade volumes shrinking due to a pandemic. Answer A à firm-specific event, all the other alternatives describe system-wide Developments 13. Which of the following statements regarding portfolio diversification is false? A) Adding two stocks from unrelated industries to a portfolio is more likely to contribute to diversification than adding two stocks from the same industry, all else being equal. B) Since unsystematic events are largely uncorrelated across stocks, increasing the number of stocks in a portfolio tends to drive down its total unsystematic risk. C) The weights of individual assets in a portfolio are a significant determinant of portfolio diversification. D) Through effective diversification, one can drive the systematic risk exposure of a portfolio to zero. Answer D à Diversification reduces non-systematic risk but it will not have an impact on systematic risk exposure 14. In the graph below, A (what the y-axis measures), B (what the vertical distance between the curve and the grey rectangle measures), and C (what the height of the grey rectangle measures) would be: A) A: total portfolio risk, B: systematic risk, C: non-systematic risk B) A: total portfolio risk, B: non-systematic risk, C: systematic risk C) A: systematic risk B: total portfolio risk, C: non-systematic risk D) A: systematic risk B: non-systematic risk, C: total portfolio risk Answer B à total portfolio risk = systematic risk + non-systematic risk, nonsystematic risk decreases as we add more securities to the portfolio while systematic risk is unaffected 15. The correlation coefficient between two stock returns measures: A) The tendency of the two returns to move together B) The incremental risk caused by adding the two stocks to a well-diversified portfolio C) The tendency of the systematic component of the two stock returns to move together D) The tendency of the non-systematic component of the two stock returns to move together Answer A à the correlation coefficient makes no distinction between the

systematic and non-systematic components of returns, it is a measure of comovement for the entire return. 16. ABC stock has an estimated beta of 1.5 and the risk-free rate and the market risk premium are estimated as 1.5% and 6% per year, respectively. ABC stock’s expected return according to the Capital Asset Pricing Model (CAPM) would be closest to: A) �[�] = 6% B) �[�] = 7.5% C) �[�] = 8.25% D) �[�] = 10.5% Answer D à E[r] = rf + beta * MRP = 1.5 + 1.5*6 = 10.5% 17. DEF stock is expected to pay $1 of dividends per share next year, the discount rate suitable for valuing its dividend stream is 10% per year and dividends are expected to grow at a rate of 6% per year forever. Using the Gordon constant dividend growth model, our estimate for the current price of DEF stock would be closest to: A) $10 B) $16.67 C) $25 D) $50 Answer C à Price = D1/(r-g), 1/0.04=25 18. Which of the following statements regarding the Gordon constant dividend growth model is false? A) The model is best suited for firms growing at a rate comparable to or lower than the nominal growth in the economy and which have well established dividend pay-out policies that they intend to continue into the future. B) The perpetual growth rate assumption, g, in the model has to be less than the discount rate, r. C) The perpetual growth rate used can be greater than the long-run nominal growth rate in the economy. D) A multi-stage growth assumption is likely to be more suitable than as single perpetual growth stage for firms that are in new industries. Answer C à if the growth rate in dividends is faster, the company will surpass the entire economy in size 19. Which of the following expressions regarding the CAPM beta is correct? A) βi = cov(ri,rM)/σM B) βi = cov(ri,rM)/σ 2M C) βi = corr(ri,rM)/ σ 2M D) βi = corr(ri,rM)/ σM Answer B à covariance of security i’s return with the market return over market Variance

20. Which of the following is not an assumption made by the CAPM? A) Investors face not taxes or transaction costs B) Investors have identical risk preferences C) Investors can borrow and lend at the risk free rate of interest D) Investors have homogeneous expectations, they use the same set of inputs for their portfolio optimisation. Answer B à Investors can differ in their risk preferences. They are required to use the same set of inputs for portfolio optimisation, face no taxes or transaction costs and can borrow and lend at the risk free rate. 21. In practice, when estimating the CAPM beta of a stock, an analyst is likely to A) use most recent return data for the stock and a broad market index to run an OLS regression B) use the beta value reported in the company’s most recent annual report C) obtain the beta of a similar stock from a different country D) use only the beta for the industry to which the company belongs Answer A à run a regression on historical return data, company returns regressed over index returns 22. An "aggressive" common stock would have a beta A) equal to zero. B) greater than one. C) equal to one. D) less than one. Answer B à definition of an aggressive stock in this context, β > 1 23. ABC Inc. common stock has a beta of 0.90, while DEF Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the CAPM and making use of the information above, the required return on ABC’s common stock should be ________ , and the required return on DEF's common stock should be _______. A) 3.6 percent; 7.2 percent B) 9.6 percent; 13.2 percent C) 9.0 percent; 18.0 percent D) 14.0 percent; 23.0 percent Answer: B à ABC expected return = 4% + 0.9*(10%-4%) DEF expected return= 4% + 1.8*(10%-4%) 24. The beta of a portfolio that has a 30% corporate bond portfolio component with a beta of 0.2 and a 70% growth-stock component with 1.8 beta would be closest to A) 0.20 B) 1.80 C) 1.32 D) 1.00 Answer: C à portfolio beta = 0.3*0.2 + 0.7*1.8= 1.32

25. Which of the following statements regarding a stock would need to hold for an equity analyst to conclude that the stock is correctly priced? A) The stock’s required rate of return is close to its estimated rate of return from capital gains plus dividend income. B) The stock’s required rate of return falls significantly below its estimated rate of return from capital gains plus dividend income. C) The stock’s required rate of return exceeds significantly its estimated rate of return from capital gains plus dividend income. D) The stock’s estimated rate of dividend growth is close to its required rate of return. Answer: A à if the stock is expected to just about generate its required rate of return in the form of capital gains and dividend income, then it is correctly priced. 26. Which of the following statements is true? a. The aim of hedging is to make profits. b. Hedging is a strategy that firms implement in order to mitigate their risk exposure. c. Hedging can prevent all negative events. d. Derivative instruments are only of use for the purpose of hedging. For further information/ explanation on why this is correct please see Moodle book available for this topic. 27. Which of the following characteristics refer to the Over-the-counter market (OTC)? a. Relaxed regulation that could in some cases lead to less transparent deals b. Smaller volume of trading in comparison to exchange traded markets for derivatives c. Standardised contracts are traded with specific size and date d. Participants cannot negotiate terms. For further information/ explanation on why this is correct please see Moodle book available for this topic. 28. Assuming that an investor has invested some amount in a fixed rate bond at a prevailing price, which offers her a coupon rate of 10% and the interest rates rise to 12%. What type of risk is the investor exposed to? a. Credit risk b. Interest rate risk c. Liquidity risk d. Business risk For further information/ explanation on why this is correct please see Moodle book available for this topic. 29. Hedging can sometimes lead to adverse effects. Which of the following scenarios reflects that? a. Airline X hedging against an oil price increase, and future spot prices end up decreasing. b. Airline Y hedging against an oil price decrease, and future spot prices end up decreasing. c. Airline Z hedging against an oil price increase, and future spot prices end up increasing. d. Hedging can never lead to adverse effects. For further information/ explanation on why this is correct please see Moodle book available for this topic.

30. Which of the following is not a characteristic of a futures contract? a. Exchange traded b. Settled daily c. Private contract between 2 parties d. No credit risk For further information/ explanation on why this is correct please see Moodle book available for this topic. 31. State which of the following are TRUE or FALSE i. A firm’s risk exposure to exchange rate changes can be eliminated through hedging. True ii. Derivatives are traded only on regulated exchange markets. False iii. The OTC market is a strictly regulated and transparent market False iv. An increase of interest rates, exposes bond holders to interest rate risk True v. A New Zealand company that exports goods to Europe can be exposed to interest rate risk True vi. Derivatives are instruments that derive their value from the performance of an underlying asset or a group of underlying assets True vii. Hedging can fully eliminate the impact of negative events. False viii. Liquidity risk relates to the scenario where a company faces difficulties to meet their financial commitments. True ix. A borrower failing to make a scheduled payment is an example of market risk. False x. Derivatives are used in order to exploit price differences on the same instrument, among others. True 32. Which of the following is correct? a. Futures contracts are traded at OTC markets, whereas forward contracts are exchange traded. b. Forward contracts are traded at OTC markets, whereas futures contracts are exchange traded. c. Futures contracts are tailor-made, whereas forward contracts are standardized d. Forward contracts are settled daily, whereas futures contracts are settled at the end of the contract. 33. Which of the following statements best describe what derivatives are: a. Instruments that derive their value over time from the performance of an underlying asset or group of underlying assets. b. Securities that derive their value over time from the risk exposure of an underlying asset or group of underlying assets. c. Tradeable instruments that derive their value from the performance of stocks only. d. Tradeable instruments that derive their value from the performance of stocks and bonds only. For further information/ explanation on why this is correct please see Moodle book available for this topic. 34. What type of risk does a company face if they have difficulties to meet their financial

commitments? a. Market risk b. Financial risk c. Liquidity risk d. Credit risk For further information/ explanation on why this is correct please see Moodle book available for this topic....