...a corporate bond with a face value of $1,000 matures in 3 years, has a 9 coupon paid at the end of each year, and a market price of $950? A : With Excel Rate function, FV $1000, Nper 3 ...

Q&A: List at least 2 difficulties that specialists have with block trades

A : the "three Cs" with block trading (block transactions of over 10,000 shares) Capital: no enough capital needed to acquire blocks of 10,000 shares Commitment: unwilling to commit the capital ...

Q&A: List 3 common usage of market indexes.

A As benchmarks for portfolio performance (on a risk-adjusted basis ) To create index funds (i.e to track the performance of the specific market series over time.) To help "technicians" predict ...

Q&A: At what price will an investor get a margin call?

...suppose the investor pays $6,000 toward the purchase of 100 shares at $100 per share), borrowing the remaining from the broker. The maintenance margin is set to be 30 . A The initial percentage ...

Q&A: A researcher wishes to estimate the mean SAT score and...

...compute a 95 confidence interval from a random sample of 10 scores: 320, 380, 400, 420, 500, 520, 600, 660, 720, and 780. Assume that the standard deviation of SAT verbal scores in a school ...

Q&A: Suppose there is a price-weighted market index...

composed of two stocks, with stock A selling for $100, and stock B $25. What's the price of the index? What's the rate of return if stock A increases by 10 , and B increases by 20 ? What if ...

Q&A: A researcher wishes to estimate the mean reading speed of...

...high-school graduates and compute the 95 confidence interval from a random sample of 6 graduates: 200 words per minute, 240, 300, 410, 450, and 600. A : When constructing confidence intervals ...

Q&A: In an equal-weighted market index...

composed stock A and stock B, what's the rate of return if stock A increases by 10 , and B increases by 20 ? A An equally weighted arithmetic average of these returns would be: (10 20 ) ...

Q&A: What's the appropriate alternative hypothesis if...

...an analyst hopes to show that the mean monthly return for stocks listed on the XYZ Stock Exchange is significantly different from 1 ? A : H(1): u ! 1 . The alternative hypothesis corresponds ...

Q&A: List some of the market index differences...

...between bond market and stock market. A : Bond market indexes are typically computed using value-weighting based on the outstanding amount of par value of the underlying issues based on ...

Q&A: How to increase the power of a statistical test?

A : One way is to increase the significance level, therefore reducing the risk of a Type II error. The downside is it also increases the risk of a Type I error. Bonus Points The power of a ...

Q&A: Suppose there is a value-weighted market index...

composed of 100 shares of stock A selling for $100, and 2000 shares of stock B selling for $25. What's the rate of return if stock A increases by 10 , and B increases by 20 ? A : the new market ...

Q&A: An analyst is trying to prove that the annualized return of S&P 500...

...is greater than 15 . Explain how a Type I and Type II errors could have been made. A : H(0) d 15 Type I: Concluding that the return is greater than 15 when in fact it's less than 15 . Type ...

Q&A: Give some examples of when a nonparametric test should be used.

A When the data is in the form of rankings (ordinal-scale data): ie. rank the performance of investment managers When the data does not involve a parameter: ie. evaluate whether or not an ...

Q&A: What does it mean for the price of...

... an instrument to follow a random walk? A : Successive price changes are independent of each other (ie. no correlation) Bonus Points New information about securities comes to the market ...

Q&A: Which form of the efficient market hypothesis...

...is widely believed to be true for S P 500? A : both the weak form and semi-strong form of EMH, since S P 500 is one of the most widely tracked and analyzed index. Bonus Points Three versions ...

Q&A: List some of the assumptions technical analysis makes...

...in regard to the notion of efficient markets. A The process of disseminating new information takes time. Stock prices move to new equilibriums in a gradual manner. Bonus Points Technical ...

Q&A: A bank has made a 10%, 5-year, $100 mil fixed-rate loan...

...and wants to swap the fixed annual interest payment into a floating-rate annuity. If the bank could borrow at a fixed rate of 8 for 5 years, what is the notional principal of the swap? A ...

Q&A: A Bank issues 1,000 dual currency bonds...

Principal: USD $1,000, sold and redeemed in USD Coupon: JPY 6.5 million, semiannual. Maturity: 5 years. How can the bonds be synthesized? A The Bank's Cash flows At issue: Bank receives ...

Q&A: An analyst thinks that the mean return rate for tax-exempt municipal bonds...

...is 9.1 with a standard deviation of 3 . What is the minimum percentage of return rates for tax-exempt municipal bonds with rates between 3.1 and 15.1 ? A : 3.7 , 14.5 lie with /- 2 standard ...

Q&A: An analyst wants to calculate a 95% confidence interval for...

...the projected mean return of a portfolio he manages (assuming the return is normal). His latest calculations show that this portfolio has a mean return of 8 and a variance of 36. What is ...

Q&A: An investor enters into a 5-year interest rate swap...

...The notional amount is $100 million and the reference rate is 3-month LIBOR. Payments are made quarterly. The swap rate that the investor agrees to pay is 5 . How much should the investor ...

Q&A: Are listed futures default free?

A : Yes, as the clearinghouse of the futures exchange is interposed between buyers and sellers in every futures. The net futures position of the clearinghouse is zerosince the clearinghouseacts ...

Q&A: As the interest rates drop...

...will you expect the yields of GNMA to pick up or drop? A : As interest rates drop, the prepayments start to increase and the value of a GNMA tends to approach its par amount. For a noncallable ...

Q&A: compute the price of the call option using Black-Scholes-Merton model

Assume that a stock trades at $100 and the continuously compounding risk-free interest rate is 6 . A call option on the stock has an exercise price of $100 and expires in one year. The standard ...

Q&A: For a call option with a delta of 0.5...

...a$0.5 increase in the underlying price (current price: $100) will cause the price of the call option tomovein which direction by how much? A : increase by 0.5 $0.5 $0.25. Category: C+ ...

Q&A: For normal and lognormal distributions, list some of their similarities...

...as well as differences. A A random variable Y follows a lognormal distribution if its natural logarithm, lnY, is normally distributed. The reverse is also true: if a random variable Y follows ...

Q&A: Give an example of a call market.

A : During the early stages of development of an exchange when there are few stocks listed or a small number of active investors / traders. At the opening for stocks on the NYSE if there is ...

Q&A: Given two crude futures contracts...

...what itemson the contracts are most likely to be identical and what difference? A : Most likely identical the amount of crude oil the quality or grade of crude oil the mechanism for ...

Q&A: How does buying a put option effect...

...the return distribution of a stock,which is a bell shaped curve? A :Truncates the leftside of the curve and moves the whole bell curve to the left. Buy a protective put option protects ...

Q&A: How does the investment strategy of a speculator...

...differ from that of a hedger? A : A speculator increases expected return by increasing risks. In a well-functioning market, increased risk is associated with increased expected return ...

Q&A: How is a future contract different from a forward contract?

A : A futures contract is a forward contract with some additional features, mainly in the institutional settings in which they trade. Futures contracts always trade on an organized exchange ...

Q&A: How is an interest rate swap different from a package of forward contracts?

A : Maturities for forward or futures contracts do not extend out as far as those of an interest rate swap. An interest rate swap with a term of 20 years or longer can be obtained. An interest ...

Q&A: How to create a delta-neutral porfolio with...

...call options and stocks given in http://cppquant.blogspot.com/2005/05/qa-whats-delta-of-call-option-on.html this Q A? A : S0 $100, X $100, r 0.06, T 1, and stderr 0.1. The call price is ...

Q&A: How would investors exploit the arbitrage opportunity if...

http://cppquant.blogspot.com/2005/05/qa-what-is-price-of-put-option-that.html this put option is selling for $4? A : the put option is underpriced, so buy the option and the underlying. Suppose ...

Q&A: How would investors exploit the arbitrage opportunity if...

http://cppquant.blogspot.com/2005/05/qa-what-is-price-of-call-option-that.html this call option is selling for $3? A : the call option is overpriced, so sell the option and buy the underlying ...

Q&A: Is the distribution of this random variable X binomial?

A set of fourcredit cards consist of twoVisa cards and twoMaster cards. The cards are shuffled thoroughly, and I am dealt two cards. X is the number ofVisa cards in these two cards. A n 2 ...

Q&A: How to produce a smaller margin of error...

...given http://cppquant.blogspot.com/2005/06/qa-rates-of-return-on-assets-in.html this porfolio? A : The width of a confidence interval is reduced by using a lower level of confidence. ie ...

Q&A: List 3 characteristics of a well-functioning market.

A Availability of Information (ie. on the price and volume of past transactions and the prevailing bid and ask prices. Low transaction cost ( of the value of the trade, including the cost ...

Q&A: List 3 different exchange memberships.

A a Registered trader is one who trades on his own account a Floor broker transacts for others a Commission broker trades for her/his firm, and a Specialist makes a market in specific securities ...

Q&A: List 3 reasons why foreign investors would purchase...

...CHF denominated bonds issued by Japanese firmsthat are convertible into commonstock shares. A : when investors take a view over the longer term in the foreign exchange markets drop in ...

Q&A: should the delta of a call option be close to...

-1, 0, or 1 if it's on a stock trading at $100. The continuously compounding risk-free interest rate is 6 . The option has an exercise price of $50 and expires in one year. The standard deviation ...

Q&A: The lifetime of a 2-volt non-rechargeable battery in constant use has...

...a mean of 516 hours and a standard deviation of 60 hours. A box of 100 of these batteries is considered a random sample, what is the probability the average lifetime of the batteries in ...

Q&A: The rates of return on the assets in a portfolio are normally distributed...

...with a mean of 20 and a standard deviation of 12 . What's the probability that the return on an asset falls between 3.52 and 50.96 ? A : the z-value of 3.52 : z (-3.52 20 )/12 1.96 the ...

Q&A: What are some of the ways to duplicate a bond index?

A : Pure bond indexing: try own all the bonds in the index in proportion to their market value weights. it's difficult and costly to implement because a bond index typically consists of thousands ...

Q&A: What are the cashflows of the following interest rate swap?

...On December 15 an investor enters into $50 million NP swap with a dealer. Payments will be on 15th of March, June, September, December for one year, based on LIBOR. The investor will pay ...

Q&A: What are the lower bounds for European and American calls and puts with...

...exercise prices of $60, given that all options expire in 60 days,in which the current price of the underlying is $50 and the risk-free rate is 5 ? What if the exercise price is $40 instead ...

Q&A: What are the net payment at the end of 1st year...

...for an interest rate swapagreement in whichan investorhas agreed to paya dealer 8 fixed interest on a $1,000,000 notional amount ($80,000) for the next five years. In return,the dealerhas ...

Q&A: What are the payoffs for a 4-year Cap with a 6% Cap rate...

...a $100 million notional,a quarterly settlement frequency, a 3-month LIBOR reference rate, andthe LIBOR for the next4 quarters as shown below? Period 1 2 3 4 3-mon LIBOR 5.7 6 6.25 5.7 ...

Q&A: What is the appropriate arbitrage strategy given the following involving...

...call options with an exercise price of $100 expiring in6 months. The risk-free rate is 10 . The call is priced at $7.5, and the put is priced at $4.25. The underlying price is $99. A : ...

Q&A: What is the market value of the European receiver swaption....

... at expiration if it has an exercise rate of 10 on http://cppquant.blogspot.com/2005/05/qa-what-should-swap-fixed-rate.html this two-year swap and expires in 1 years? A : PV Notional Principal ...

Q&A: What is the price of a call option that expires in 2 years...

Suppose the price of a stock is $100. It can either rise or fall by 10 in any 12 months. The risk-free rate is 6 . The exercise price of a call option on the stock is $100. A Risk-neutral ...

Q&A: What is the price of a call option that expires in 6 months...

...assuming a stock price is $80 and in the next year it will either 90 or 75. The risk free interest rate is 6 . A call option on this stock has an exercise price of $85. A : price via the ...

Q&A: What is the price of a put option that expires in 6 months...

...assuming a stock price is $80 and in the next year it will either 90 or 75. The risk free interest rate is 6 . Aput option on this stock has an exercise price of $85. A : price via the ...

Q&A: What is the probability that the penalty paid is...

...greater than 7 and less than 12 , assuming that the penalty for withdrawing funds early from a certain account follows a uniform distribution on the interval from (5 , 10 ). A Because ...

Q&A: What should be the price of a European call...

...with an exercise price of $30 expires in 90 days, given that a European put with the same exercise price, expiration date and underlying is selling for $6. The underlying is selling for ...

Q&A: What should the swap fixed rate?

An investor enters into a two-year $20 million notional principal interest rate swap in which it promises to pay a fixed rate and receive payments at LIBOR. The payments are made every six ...

Q&A: What will be the value of his investment on the exercise date if...

...an investor buys one share of stock, a put option on the stock and simultaneously sells a call option on the stock with the same exercise price? A : stock price Max{0, excercise price ...

Q&A: What's sampling error in mean if...

...a sample of 10 observations is drawn from a population with mean 20.1. The mean of the observations equals 18.3 and the sample standard deviation equals 4.8. A : Sampling error refers to ...

Q&A: What's the % price change to...

...a 12 , 12-year bond selling for $125for /-75 bp shocks? A : approximate percentage price change for 75 bps duration x change in yield x 100 convexity adjustment 5.41 From this earlier ...

Q&A: What's the actual futures price if a T-bill futures...

...has a discount rate of 5 ? A : T-bill Futures Price (1 r/100 (90/360)) $1,000,000 (1 0.05 x (90/360)) 1,000,000 $987,500. The quoted price is 100 5 95 Bonus Points Treasure bill futures ...

Q&A: What's the cashflow if an equity swap...

...hasbeen arrangedbetween an investor and a dealer. The notional principal is $100 million, and payments will be made semiannually. Theinvestor agrees to pay the dealer the return on a small ...

Q&A: What's the cutoff for the bottom 10% of an exam...

...with scores normally distributed with m 80 and s 5? A : P(X Category: Quantitative Analysis Probability

Q&A: What's the Delta of a call option on...

...a stock trading at $100. The continuously compounding risk-free interest rate is 6 . The option has an exercise price of $100 and expires in one year. The standard deviation of the stock ...

Q&A: What's the difference between an Interest Rate Option and...

...a Forward Rate Agreement? A : the underlyingsareboth interest rate, and both have notional principals, but a FRAis a commitment to make one interest payment and receive another, whereasan ...

Q&A: What's the difference between discretely and continuously compounded rates of return?

A : A discretely compounded rate of return measures the rate of changes in the value of asset over a period under the assumption that the number of compounding periods is countable. Most standard ...

Q&A: What's the end-of-day P&L if an investor...

...purchases 2 Treasury futures contracts at 103 and the contracts are marked to the market at a price of 100? The investor has to pay the clearing house 2 (103,000 100,000) $6,000. (Marked ...

Q&A: What's the expected number of correct answers...

in this interviewexam? A :mean np 5 x 0.25 1.25, with a standard deviation of (n p (1 p)) ^0.5 (5 0.25 0.75)^0.5 0.47. can NOTapproximate the binomial with a normal distribution:approximation ...

Q&A: What's the expiration-day P&L for the protective put...

...if an investor purchases100 shares of a stock for $50/share,buysput options on that stock with an exercise price of $38 for a premium of $3/share, andthe expiration-day priceis $55? A ...

Q&A: What's the expiration-day P&L of the covered call position if...

...an investor buys a share of stock for $20, and simultaneously sells a call option on that stock for $5? The exercise price of the call is $30, the call will expire in 3 months, and the stock ...

Q&A: What's the maximum profit for the covered call...

...if an investor purchases100 shares of a stock for $38/share, sells call options on that stock with an exercise price of $50 for a premium of $3/share, and holds the option to expiration ...

Q&A: What's the min & max possible futures price movement...

...during any day's futures trading? Tick size and daily price limit respectively. For example, the Chicago Board of Trade (CBOT) establishes that the minimum price fluctuation , or tick ...

Q&A: What's the no-arbitrage value of the call option...

in http://cppquant.blogspot.com/2005/05/qa-what-is-price-of-call-option-that.html this Q A? A construct a portfolio of stocks and calls in which final payoff (at expiration) is up/down state ...

Q&A: What's the no-arbitrage value of the put option...

in http://cppquant.blogspot.com/2005/05/qa-what-is-price-of-put-option-that.html this Q A? A construct a portfolio of stocks and calls in which final payoff (at expiration) is up/down state ...

Q&A: What's the payoff to the holder of an option...

...expiring in 90 days on 180-day LIBOR, with an exercise rate of 5.5 percentand a notional principal of $10 million, assuming that the 180-day LIBOR is 6 percent on the expiration day? A ...

Q&A: What's the porfolio's duration...

...given the following 3 types of option free bonds? Bond Price # of Bonds 10 , 5-year $100 40,000 8 , 15-year $84.6275 50,000 14 , 30-year $137.8586 10,000 A :Portfolio Duration w(1)D(1 ...

Q&A: What's the price of the options using Black-Scholes-Merton model

Consider call and put options with a common exercise price of $100 and 150 days until expiration. The underlying stock trades for $102, and that you expect the stock to pay a $3 dividend in ...

Q&A: What's the probability of a normal random variable X...

...equal to a particular value, say 15? what about P(X A : P(X 15) 0. Can only calculate the probability of x when it falls in a range, such as14 x 54. P(X mean) 50 . therefore P(X Category ...

Q&A: What's the probability that the return on an asset in a portfolio...

... falls between 3.52 and 50.96 if the rates of return on the assets inthe portfolio are normally distributed, with a mean of 20 and a standard deviation of 12 ? A If the return on the ...

Q&A: What's the probability that the student passes the interview test?

There are5 multiple choice questions on aninterview test, each having4answers. Each question is worth 5 points and only oneanswers per question is correct.To pass the test one needs at least ...

Q&A: What's the PVBP of a 10%, 15-year bond...

...selling for$125.50? A Yield: Nper 15 2, Pmt 10 100, PV 125.50, FV 100, leads to Rate 3.6 2 7.2 Modified Duration: With Excel's MDuration, Settlement "January 1, 2005", Maturity "January ...

Q&A: What's the swap value 90 days into its life...

...given the following 3-mon LIBOR term structure? http://cppquant.blogspot.com/2005/05/qa-what-should-swap-fixed-rate.html The first floating payment was set at the 180-day rate of 9 . Term ...

Q&A: When will an investor receive a margin call...

...if he holds a long position in 10 oat futures contracts,with a required initial margin of $5 per contract, a maintenance margin of $2, and the following end-of-the-day prices? Day 0 Day ...

Q&A: which order is most likely to be executed sooner...

...: limit buy, limit sell, market, stop or day? A : Market order is executed immediate at the prevailing price. Limit order: A condition placed on a transaction executed through a stockbroker ...

Q&A: Which Rho is greater for...

...the followingoptions ona stock selling for $65, with 5 risk-free rate? Call option A: Exercise price X $70, Days to option expiration 15. Call option B: Exercise price X $70, Days to option ...

Q&A: why would investors want to buy ADRs?

A : When a U.S. bank buys foreign stock shares, puts them in a trust and resells trust units, the shares become known as ADR (American Depository Receipts). ADRs allow foreign shares to be ...

Q&A: Alan Greenspan, the chairman of the Federal Reserve...

...made the following remark concerning the advantages of introducing TIPS: By routinely monitoring the markets for the indexed and unindexed debt instruments, the Federal Reserve could extract ...

Q&A: Bootstrap the spot rate for...

...the 4th coupon payment period, given the followingmarket data for $100 par Treasury bonds Period Years Annual YTM (BEY)( ) Price Spot Rate (BEY) ( ) 1 .5 3.0 3.0 2 1.0 3.3 3.3 3 1.5 3 ...

Q&A: Consider an investor with a marginal tax rate of 30%...

...If municipal securities yield 6 and a comparable corporate yields 7.5 , which is the better investment? A : For an investment of $100, the municipal security will provide a yield of $6 ...

Q&A: Explain the spread between the yield of a TIP strip...

...and a nominal Treasury strip with the same maturity. A :Since anominal strip is more liquid than a TIP strip, it should provide a lower yield.But the nominal strip presents the possibility ...

Q&A: Explain why most of the callable investment-grade corporate bonds...

...are issued during late 1980s and early 1990s. A : Calls were mispriced in the early 1980s but are priced fairly now given the development of options pricing models and other financial innovations ...

Q&A: For bond valuations, what are the two...

...common apporaches? List some of their key differences. A : The Discounted Cash Flow Valuation approach (DCF) calculates the present value of a financial asset by discountingits expected ...

Q&A: Given the prepayment risk of...

...a MBS such as GNMAand that of a Z tranche in a CMO, which investors will prefer the Z tranche, which GNMA? A : GNMAs simply pass through the prepayments on a pro-rata basis to the investors ...

Q&A: Given two identical stock index options...

...oneoffered by exchanges (ie. the listed market) and oneby dealers in the OTC market. Are investors indifferent to the choice of these two options? In the listed markets, the investors get ...

Q&A: If a forward contract is an obligation...

...as opposed to a right, to buy/sell, can oneget out of it prior to expiration? A : Notdirectly. One could, however,enter into an opposite transaction with the same or a different counterparty ...

Q&A: If an instrument is priced rationally...

...should there be any arbitrage opportunity? If yes, how much investment does it require to turn that into a profit? If not, why not? A : there should be no arbitrage opportunity according ...

Q&A: If the inflation risk is high, how will the central bank...

...attempt to contain that risk? A : The central bank will try to tighten the availability of credit, by increasing the target fed funds rate (thus making credit dearer). This will force firms ...

Q&A: In the Wall Street Journal, you note that the GNMA yields...

...are about100 basis points higher than Treasuries with comparable maturities. On this basis can we conclude that GNMAs are better investments than Treasuries? A : GNMAs have prepayment risk ...

Q&A: Is there an arbitrage opportunity...

...given the following market data for $1000 par bonds? Year .5 1.0 1.5 2.0 Market Price $900 $900 $900 $900 Coupon 10 10 10 10 Spot Rate 15 16 15 14 A : One should buy the 2 year Treasury ...

Q&A: List at least 2 reasons why Yield-To-Maturity...

...of a bond may not be realized. A Reinvestment risk: future interest rates may be less than the YTM at the time the bond is purchased, leading to less reinvestment income (ie. the interest ...

Q&A: Under what circumstance should an American call...

...be exercised early? A : American call options are never exercised early unless the underlying makes cash payments. Stocks pay dividends, bonds pay interest, foreign currencies pay interest ...

Q&A: Under what types of market structure would...

...it be possible to have two separate but simultaneous transactions where bondX was traded at unit prices of $105 and $95 respectively? A :A broker gets involve when buyers and sellers of ...

Q&A: What is the duration/convexity of...

...a 12 , 12-year, option-free bond selling at$125? A : Duration (V- V+) / (2 V0 yield change) yield: with Excel Rate function, Nper 24, PV 125, PMT 12/2, FV 100, which leads to rate 4 ...

Q&A: What is the reinvestment income if...

...an investor holds a 14.00 , 17.50 year bond bought at $950.00 to maturity, assuming rates remain constant? A Required Rate of Return current yield/2 Annual interest payment / Bond price ...

Q&A: What is the reinvestment income if...

...an investor holds a 14.00 , 17.50 year bond bought at $950.00 to maturity, with the market interest rate at 15.00 ? A FV of total cash flows PV (1+r)^N $950.00 (1+15/2/100)^(17.50 2) $11940 ...

Q&A: What is the total cash flows received...

... if an investor purchases a 3-year, 8 coupon bond that has a 10 YTM, assuming the semi-annual bond is held to maturity? A : Total cash flow FV of total Interest Payments Capital gain ...

Q&A: What's the 6-month forward rate...

... 2 years from now given the following spot rates? Period Years to Maturity Spot Rate 1 .5 4.250 2 1 4.750 3 1.5 5.050 4 2.0 7.000 5 2.5 8.750 6 3.0 9.250 A : 4th period forward rate can ...

Q&A: What's the reinvestment income of...

...the 2nd coupon payment of a 5-year, 8 $100 par bond when the reinvestment rate is 10 ? A : coupon FV par FV 100 8 /2 5.9-4 $1.9 With Excel FV function, Nper 8, Rate 10/2 ,PV 100 8 /2, ...

Q&A: What's the yield-to-first-call of...

...a 8-year,6 ,$100 par bond selling for $104.50,if the first call dateis in 3 years with a call priceof $102? A :With Excel Rate function, Nper 6, PV 104.5, PMT 6/2 3.5, FV 102, rate 2.5 ...

Q&A: Which is the Z-spread for...

...a3.5-year, 9.60 , $100 par non-Treasury bondselling for 110.2950: 100 basis points, 143bp, or 165bp? Period Spot Rate 1 0.03 2 0.033 3 0.035053 4 0.039164 5 0.044376 6 0.04752 7 0.049622 ...

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