[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]
Which of the following statements relating to convertible debt are true:
I. A hard call protection means the bond cannot be called by the issuer till the share price reaches a threshold
II. It is advantageous for the issuer to call its convertible securities when the share price exceeds the conversion price
III. When the issuer's share prices is very high, the convertible bond trades at a discount to the value of the shares it is convertible into
IV. Convertible bonds generally have to carry a higher coupon than on equivalent non-convertible securities to make them attractive to investors
A borrower pays a floating rate on a loan and wishes to convert it to a position where a fixed rate is paid. Which of the following can be used to accomplish this objective?
I. A short position in a fixed rate bond and a long position in an FRN
II. An long position in an interest rate collar and long an FRN
III. A short position in a fixed rate bond and a short position in an FRN
IV. An interest rate swap where the investor pays the fixed rate
A risk analyst working for an asset manager with a large debt portfolio is tasked with determining the suitability of using a traded debt ETF as a hedge against the value of the debt portfolio. He/she calculates the minimum variance hedge ratio to be exactly 1.0.
Given the above facts, which of the following statements are certainly true:
I. The ETF represents a perfect hedge for the portfolio
II. The volatility of the portfolio is the same as that for the ETF
III. The ETF cannot be used as an effective hedge for the debt portfolio
IV. None of the above
Assuming zero taxes, the effect of increasing leverage in the capital structure of a firm is to:
If r be the yield of a bond, which of the following relationships is true:
What is the fair price for a bond paying annual coupons at 5% and maturing in 5 years. Assume par value of $100 and the yield curve is flat at 6%.
Consider a portfolio with a large number of uncorrelated assets, each carrying an equal weight in the portfolio. Which of the following statements accurately describes the volatility of the portfolio?
An investor has a portfolio with a value of $1,000,000 and a beta of 2.5. He believes the portfolio carries more market risk than he desires and wishes to reduce the beta to 1. How many futures contracts should be buy or sell to reduce the beta if the futures contracts have a beta of 1.2 and the notional value of each contract is $240,000?
For a deep out-of-the-money option:
A fund manager buys a gold futures contract at $1000 per troy ounce, each contract being worth 100 ounces of gold. Initial margin is $5,000 per contract, and the exchange requires a maintenance margin to be maintained at $4,000 per contract. What is the most prices can fall before the fund manager faces a margin call?