FINM7405 Practice Questions:

1. Complete the sentence: short selling leads to…
a. Greater financial risk
b. Higher levels of volatility
c. Greater market liquidity
d. Less efficient price discovery
2. What is not a condition for an arbitrage profit?
a. Asset mispricing across markets
b. The trade is risk-free
c. The law of one price
d. You recoup your initial investment
3. What is the relationship between credit spreads and the real economy?
a. Credit spreads co-move with the real economy
b. Credit spreads are independent from movements in the real economy
c. Credit spreads widen during time of economic prosperity
d. Credit spreads tighten during economic booms
4. A borrower issues a floating rate note, what feature would benefit them if interest rates were
to increase?
a. A cap
b. A reference rate
c. A floor
d. A mandatory repayment amount
5. A bond matures in 10 years with a coupon of 3.5% pa. Its yield is 4.83% p.a. and it has a
modified duration of 5.75. If the yield of the bond declines to 4.33%, the approximate
percentage price change for the bond is closest to
a. 3.01%
b. 2.88%
c. 2.90%
d. 2.45%
6. A 3-year 4% coupon-paying bond has a yield to maturity of 5.5% p.a. Calculate the bond’s
price with 28 months to maturity remaining (assume semi-annual compounding, FV = 100).
a. $93.08
b. $93.93
c. $94.02
d. $93.83
7. On 2 March 2020, the quoted price for the April 2020 10-year Treasury bond futures contract
was $96.840. On 10 April 1997, the quoted price was $99.030. If Mary held the contract ‘long’
over this period, how much has she made (or lost)? The coupon rate is 5% (compounding
semi-annually)
a. $22,647.44
b. $20,488.12
c. $25,482.21
d. $24,543.69
8. You are a company treasurer worried about a fall in interest rates. To completely hedge
against movements in interest rates will you…
a. Buy BAB futures
b. Sell BAB option
c. Buy BAB options
d. Sell BAB futures
9. Four years ago, you entered into a 6-year interest rate swap by agreeing to pay 4% fixed rate
in exchange for receiving floating rate. If your counterparty were to default today when the
current yield to maturity of an equivalent 2-year fixed coupon bond is 4%, how would this
affect your wealth?
a. No impact to our wealth
b. We will experience a gain
c. We will experience a loss
d. Insufficient information
10. You have just bought a 2-year EuroPound floating- coupon bond, priced on par at GBP100.
Being an Australian asset manager, you decided to hedge your position using a ‘floatingfor-
floating’ currency swap. You observe the following current information:
? Spot foreign exchange rate = AUD1.60 for 1 GBP
? The tenor of the swap is 3 years
? Interest is repaid every half a year
? The current 6-mth AUD-LIBOR is 4.1% pa
? The current 6-mth GBP-LIBOR is 5.6% pa
Three months have now passed, and you observe the following information:
? 3-mth to maturity AUD spot rate is 2.5% pa
? 3-mth to maturity GBP spot rate is 2.3% pa
? Current spot exchange rate is AUD1.65/GBP
What is the value of the currency swap to you?
a. AUD –$6.384
b. AUD $6.384
c. AUD –$12.654
d. AUD $12.654