1. A transport service company is running four buses between two towns that are 50 Kms apart.

The seating capacity of each bus is 48 passengers. The following particulars were obtained from its records for the month of June, 2003: Rs. 4,800 2,000 8,000 1,600 3,200 5,200 4,000 28,800

Wages of drivers, conductors and cleaners Salaries of Office and Supervisory staff Diesel oil and other oils Repairs and Maintenance Tax, Insurance, etc. Depreciation Interest and other charges

Actual passengers carried were 75% of the seating capacity. All the four buses ran on all the days of the month. Each bus made one round trip per day. Ascertain the cost per passenger per Kilometer. a. 0.0667 (7 paise) b. 0.0756 (8 paise) c. 0.0523 (5 paise) 2. A bond that exhibits negative convexity at low yield levels (relative to the bonds coupon rate) and positive convexity at high yield levels (relative to the bonds coupon rate) is most likely a(n): a. Putable bond b. Callable bond c. Option-free bond selling at a discount 3. An analyst accurately calculates that the price of an option-free bond with a 9% coupon would experience a 12% change if market yields increase 100 basis points. If market yields decrease 100 basis points, the bonds price would most likely: a. Increase by 12% b. Increase by less than 12% c. Increase by more than 12% 4. At yield levels that are close to the bonds coupon rate, is the price of an option-free bond higher than the price of an otherwise identical: Callable bond? a. b. c. No No Yes Putable bond? No Yes No

5. The duration of an option-free bond priced at $900 is 8.5. If yields decrease by 150 basis points, the most accurate statement about the actual price of the bond after the decrease in yields is that the actual price will be: a. Equal to $1,014.75 b. Greater than $1,014.75 c. Less than 1,014.75 because the lower level of yields increases the bonds interest rate risk. 6. An investor holds two bonds in her portfolio as follows: Bond 3-year, 6% coupon 10-year, 5% coupon The portfolios duration is closest to: a. 4.54 b. 5.11 c. 5.45 7. Western Investments holds a fixed-income portfolio comprised of four bonds whose market value and durations are given in the table. Bond A $200,000 4 Bond B $300,000 6 Bond C $250,000 7 Bond D $550,000 8 Market Value ($) 300,521 567,000 Duration 2.67 6.41

Market Value Duration

The portfolios duration is closest to: a. 6.06 b. 6.25 c. 6.73 8. Consider the following statements about non-callable bonds. Statement 1: For non-callable bonds, duration provides only a linear approximation of a bonds price changes as interest rates change. Statement 2: Incorporating convexity into the analysis of a non-callable bonds price changes as interest rates change always results in higher bond price estimates than derived by using only the bonds duration. This is true whether interest rates increase or decrease Are the statements most likely correct or incorrect? a. Both statements are correct b. Statement 1 is incorrect, but Statement 2 is correct c. Statement 1 is correct, but statement 2 is incorrect

9. The modified duration for a bond is 17.45. The market price of the bond is $1,105. The price value of a basis point for the bond is closest to: a. $1.93 b. $64.81 c. $192.82 10. Consider the following statements about bond price volatility. Statement 1: If interest rates increase dramatically, callable bonds can exhibit negative convexity Statement 2: The higher the level of interest rates, the lower the price volatility of a bond to changes in interest rates Are the statements most likely correct or incorrect? a. Both statements are incorrect b. Statement 1 is incorrect, but Statement 2 is correct c. Statement 1 is correct, but statement 2 is incorrect 11. From the time of issuance until the bond matures, which of the following bonds is most likely to exhibit negative convexity? a. A putable bond b. A callable bond c. An option-free bond selling at a discount 12. A bond with a par value of $1,000 has a duration of 6.2. If the yield on the bond is expected to change from 8.80% to 8.95%, the estimated new price for the bond following the expected change in yield is best described as being: a. 0.93% lower than the bonds current price b. 1.70% lower than the bonds current price c. 10.57% lower than the bonds current price 13. A coupon-bearing bond purchased when issued at par value was held until maturity during which time interest rates rose. The ex-post realised return of the bond investment most likely was: a. Above the YTM at the time of issue b. Below the YTM at the time of issue c. Equal to the YTM at the time of issue because the bond was held until maturity 14. The Z-spread for a callable bond is 120 basis points (bp). The reported option-adjusted spread for the bond is 70 bps. The option cost is closest to: a. 50 bps b. 70 bps c. 190 bps 15. Consider the following statements about callable bonds:

Statement 1: Given a callable bonds price and relative to a given spot rate curve, more than one zero-volatility spread (Z-spread) might exist depending on the outcomes of the specific model used to generate the zero-volatility spread Statement 2: Given a callable bonds price and relative to a given spot rate curve, more than one option-adjusted spread (OAS) might exist depending on the outcomes of the specific model used to generate the option-adjusted spread Are the statements most likely correct or incorrect? a. Both statements are correct b. Statement 1 is incorrect, but Statement 2 is correct c. Statement 1 is correct, but statement 2 is incorrect 16. An analyst made the following statement: Regarding bonds with options, the Z-spread can be computed as approximately the option-adjusted spread (OAS) plus the option cost. Therefore, the Z-spread will sometimes be greater for bonds with options than for bonds without options, and sometimes less. Is the analysts statement correct with respect to: z-spread calculation? Z-spread for bonds with options? a. No Yes b. Yes No c. Yes Yes 17. If the Treasury par yield curve is upward sloping, will the short-term forward-rate curve always lie above the Treasury: Par yield curve? Theoretical spot curve? a. No Yes b. Yes No c. Yes Yes 18. With respect to bond yield spreads, is the term structure of slope rates considered when determining the: Nominal yield spread? Zero- volatility yield spread? a. No No b. No Yes c. Yes No 19. With respect to callable bonds, the zero-volatility spread will most likely be: a. Less than the option-adjusted spread b. Greater than the option-adjusted spread c. Equal to the option-adjusted spread, but substantially less than the nominal spread 20. An invertor is considering the purchase of three option-free bonds: Bond Coupon Rate (%) 1 7.5 2 8.0 3 8.5

All three bonds have the same time remaining to maturity and the same 8.0% yield to maturity. If the investor plans to hold the bonds to maturity, the bond with the total dollar return that is most dependent on reinvestment income is Bond: a. 1 b. 2 c. 3 21. A treasury bill with 64 days from settlement to maturity is selling for $0.995 per $1 of maturity value. The bills yield on a discount basis is closest to: a. 2.81% b. 2.85% c. 2.90% 22. If the standard deviation of asset A is 12.2%, the standard deviation of asset B is 8.9%, and the correlation coefficient is 0.20, what is the covariance between A and B? a. 0.0001 b. 0.0022 c. 0.0031 d. 0.4500 23. A bond has a par value of $5,000 and a coupon rate of 8.5% payable semi-annually. The bond is currently trading at 112.16. What is the dollar amount of the semi-annual coupon payment? a. $238.33 b. $425.00 c. $212.50 24. All other factors being equal, would bond yield spreads from Treasury securities most likely be larger (wider): For bond issues that are For bonds issued with put options or Liquid or illiquid? with call options? a. b. c. Liquid Illiquid Illiquid Call options Put options Call options

25. An analyst made the following statement: we should purchase Treasury notes because they are risk-free. Default risk is essentially non-existent. Is the analysts statement correct with respect to: Risk-free? Default risk? a. No No b. No Yes c. Yes No

26. In a normal yield curve environment, the relationship between yield and maturity can be best described as: a. The longer the maturity, the lower the yield. b. The longer the maturity, the higher the yield. c. Maturity and yield are independent of each other. 27. Frieda Wannamaker is a taxable investor who is currently in the 28% income-tax bracket. She is considering purchasing a tax-exempt bond with a yield of 3.75%. The taxable equivalent yield on this bond is closest to: a. 1.46% b. 5.21% c. 7.47% 28. Wayne Sewage and Sanitatin District has $10,000,000 of 4.85% coupon tax-exempt municipal bonds outstanding. All else held constant, if the marginal tax rate of an individual investor holding $10,000 worth of these bonds is reduced to 20% from a starting value of 35%: a. The taxable-equivalent yield for that investor will not change. b. The taxable-equivalent yield increases from 6.0625% to 7.4615%. c. The investor will be more inclined to purchase equivalent risk corporate bonds. 29. Can an invested (i.e., downward sloping) yield curve occur with the three theories of the term structure of interest rates? (Pure expectations theory, liquidity preference theory, and market segmentation theory.) a. Yes b. All except pure expectations c. All except liquidity preference 30. The nominal yield spread for a callable bond will be, in general: a. Solely dependent on the default risk of the bond. b. Solely dependent on the slope of the term structure of interest rates. c. Greater than the nominal yield spread for a comparable non-callable bond. 31. Acme Industries bonds have a yield-to-maturity (YTM) of 7.45%. If a similar maturity U.S. Treasury bond exhibits a YTM of 6.90%: a. The yield ratio is 1.08 and the relative yield spread is 0.08. b. The absolute yield spread is 55 basis points and the relative yield spread is 1.08. c. The absolute yield spread is 55 basis points and the relative yield spread is 0.93.