FIN3020
Exam Time Table
Code FIN3020
Approved calculators only permitted
LEVEL 3
EXAMINATION OF THE DEGREE OF BACHELOR OF SCIENCE
(Finance)
Thursday, 7th May 2020 9:30 PM - 11:30 PM
Examiners: Prof Barbara Casu and the internal examiners
Answer any TWO questions from SECTION A AND any TWO questions from section B
Allocation of marks within questions is shown
You have TWO hours to complete the paper (one additional hour is provided for
downloading questions and uploading your answers)
DEADLINE Your answers must be submitted by 12:30 on Test Date. This is a strict deadline which
must be adhered to.
UPLOADS Your answers should be submitted via https://canvas.qub.ac.uk
If you need to use handwritten answers there are several options:
• Submit individual photos directly to Canvas using your phone browser at https://canvas.
qub.ac.uk (this may work better than using the Canvas app); or
• Download the Microsoft Lens app to your phone to produce a PDF, and upload this to Canvas
via your OneDrive (https://community.canvaslms.com/docs/DOC-10560-4212675755); or
• Email yourself the photos to compile them on your computer, and then submit via Canvas
CONTACT DURING THE TEST
If you have queries during the test you can email declan.french@qub.ac.uk. If you have broadband
issues and need to use the phone, you can contact the Management School office on 028 9097
4200. If you have technical queries, such as around accessing Canvas, you can contact the Exams
Office at exams@qub.ac.uk
STATEMENT OF INTEGRITY
By submitting the work, I declare that:
1. I have read and understood the University regulations relating to academic offences, including
collusion and plagiarism:
http://www.qub.ac.uk/directorates/AcademicStudentAffairs/AcademicAffairs
/GeneralRegulations/Procedures/ProceduresforDealingwithAcademicOffences/
2. The submission is my own original work, and no part of it has been submitted for any other
assignments, except as otherwise permitted;
3. I give my consent for the work to be scanned using a plagiarism detection software.
4. I agree to complete an oral assessment if requested to do so.
FIN3020
Answer any TWO questions from SECTION A,
AND any TWO questions from section B
SECTION A
Question 1. .
(a) Describe the main coupon types of fixed income securities. (30 marks)
(b)
(i) Use this table of U.S. Treasury bond prices (par $100 semiannual coupons)
for settle on May 15, 2020, to derive the discount factors for cash flows to
be received in 6 months, 1 year, and 1.5 years.
Coupon rate Date of maturity Price
4.5% 15/11/2020 102.15806
0% 15/5/2021 99.60120
1.75% 15/11/2021 101.64355
(ii) Suppose there existed a Treasury issue with a par value of $100 and
coupon of 2% maturing on November 15, 2021. Using the discount factors
derived from above, what would be the price of this bond ?
(iii) On May 31, 2020, an investor purchases a bond with par value $100 and
4.75% coupon rate maturing May 31, 2022 at a yield of 0.7368%. Exactly
six months later the investor sells the bond at that same yield. What is the
price of the bond on the sale date and what is the investors total return
from the bond over those six months?
(iv) Explain why an investor would buy a premium bond when that bond is
worth only par at maturity?
(70 marks)
Total 100 marks
FIN3020
Question 2. .
(a) Explain what is a Forward Rate Agreement (FRA). (20 marks)
(b) A five-year bond (par 100) with a yield of 7% (continuously compounded) pays
an 8% coupon at the end of each year.
(i) What is the bond‘s duration?
(ii) What is the bond‘s convexity?
(iii) Use (i) and (ii) to estimate the effect on the bonds price of a 0.2% decrease
in its yield.
(iv) Recalculate the bonds price on the basis of a 6.8% per annum yield and
verify that the result is in agreement with your answer to (iii).
(80 marks)
Total 100 marks
FIN3020
Question 3. .
(a) What is the pure expectations theory of the yield curve and how is it affected by
price risk and reinvestment risk ?
(40 marks)
(b) What are corporate governance ratings? (30 marks)
(c) What factors are considered by services that assign corporate governance
ratings?
(30 marks)
Total 100 marks
FIN3020
SECTION B
Question 4. .
(a) Explain what are credit default swaps.
(30 marks)
(b) Suppose that the hazard rate for a particular reference entity is 2% per annum
for the whole of the 5-year life of a credit default swap and defaults always
happen halfway through a year. Assume that payments on the CDS are made
once a year and the risk-free interest rate is 5% per annum with continuous
compounding. The recovery rate is 40%. (Ignore accrual payments in the event
that default occurs mid-year).
(i) Calculate the survival probabilities and unconditional probabilities of
default for each year.
(ii) Calculate the present value of expected payments.
(iii) Calculate the present value of the expected payoff.
(iv) Hence estimate the credit default swap spread.
(70 marks)
Total 100 marks
FIN3020
Question 5. .
(a) Outline the role of investment banks in bond issuance.
(30 marks)
(b) Explain the process of underwriting a bond offering.
(30 marks)
(c) Describe the structure, intermediaries and trading systems of the UK secondary
bond market
(40 marks)
Total 100 marks
FIN3020
Question 6. .
(a) Explain the concept of an asset-backed security.
(20 marks)
(b)
(i) Describe the process of securitisation.
(ii) Explain securitisation benefits for originators and investors.
(40 marks)
(c)
(i) Outline key risks faced by MBS investors and ways to mitigate them.
(ii) Explain the role government agencies play in MBS
(40 marks)
Total 100 marks