## CAIIB 2020 Bank Financial Management Mock Tests Set 3

Options are :

• ?25.
• ?50.
• ?100.

##### A bond initially does not make periodic payments but instead accrues them over a pre-determined period and then pays a lump sum at the end of that period. The bond subsequently makes regular periodic payments until maturity. Such a bond is best described as a:

Options are :

• step-up note.
• deferred-coupon bond.
• zero-coupon bond.

##### Three bonds are identical in credit quality and all other respects except the following: Bond X: Noncallable, accelerated sinking fund. Bond Y: Callable, accelerated sinking fund. Bond Z: Noncallable, no sinking fund. The correct order for these three bonds, from highest yield to lowest yield, is:

Options are :

• Bond Y; Bond Z; Bond X.
• Bond Y; Bond X; Bond Z.
• Bond X; Bond Z; Bond Y.

Answer :Bond Y; Bond X; Bond Z.

##### Every six months a bond pays coupon interest equal to 3% of its par value. This bond is a:

Options are :

• 6% semiannual coupon bond.
• 3% semiannual coupon bond.
• 6% annual coupon bond.

Options are :

• yield is greater than its coupon rate.
• redemption value is greater than its face value.
• price is greater than its par value.

Answer :price is greater than its par value.

Options are :

• the same.
• higher.
• lower.

##### Current spot rates are as follows: 1-Year: 6.5% 2-Year: 7.0% 3-Year: 9.2% Which of the following statements is most accurate

Options are :

• For a 3-year annual pay coupon bond, the first coupon can be discounted at 6.5%, the second coupon can be discounted at 7.0%, and the third coupon plus maturity value can be discounted at 9.2% to find the bond's arbitrage-free value.
• For a 3-year annual pay coupon bond, all cash flows can be discounted at 9.2% to find the bond's arbitrage-free value.
• The yield to maturity for 3-year annual pay coupon bond can be found by taking the geometric average of the 3 spot rates.

Answer :For a 3-year annual pay coupon bond, the first coupon can be discounted at 6.5%, the second coupon can be discounted at 7.0%, and the third coupon plus maturity value can be discounted at 9.2% to find the bond's arbitrage-free value.

Options are :

• ?1,000.
• ?1,010.
• ?983.

##### The basic purpose of derivative financial instruments is to manage some kind of risk such as all of the following except

Options are :

• Stock price movements.
• Interest rate variations.
• Currency fluctuations.
• uncollectibility of accounts receivables

##### Open account when used as a method of payment indicates.

Options are :

• The transactions are legal
• the buyer has no money to pay immediately.
• The seller wants to sell desperately.
• None of the above.

##### Which of the following statements regarding zero-coupon bonds and spot interest rates is CORRECT?

Options are :

• Spot interest rates will never vary across the term structure.
• Price appreciation creates all of the zero-coupon bond's return.
• If the yield to maturity on a 2-year zero coupon bond is 6%, then the 2-year spot rate is 3%.

Answer :Price appreciation creates all of the zero-coupon bond's return.

##### For large changes in yield, which of the following statements about using duration to estimate price changes is most accurate?  Duration alone:

Options are :

• overestimates the increase in price for increases in yield.
• underestimates the increase in price for decreases in yield.
• underestimates the increase in price for decreases in yield.

Answer :underestimates the increase in price for decreases in yield.

##### Suppose the term structure of interest rates makes an instantaneous parallel upward shift of 100 basis points. Which of the following securities experiences the largest change in value? A five-year:

Options are :

• zero-coupon bond.
• floating rate bond.
• coupon bond with a coupon rate of 5%.

##### What is the principal purpose of Interest Rate Swaps?

Options are :

• Help borrowers/lenders to switch their borrowings/lendings from fixed to floating rate structures and vice versa
• Help players maximize interest earnings
• Help accelerate interest due payments
• Help the markets increase volumes

Answer :Help borrowers/lenders to switch their borrowings/lendings from fixed to floating rate structures and vice versa

##### Leveraging implies building up _________

Options are :

• Large volume of business with relatively large amount of capital
• Small volume of business on relatively small capital
• Small volume of business with large capital
• Large volume of business with relatively small capital

Options are :

• strong.
• stable.
• weak.

##### Options are primarily used a hedge against ____________ fluctuation

Options are :

• Price
• Interest Rate
• Market
• Duration

##### What is Open position?

Options are :

• Any residual position of a bank at the end of the day-over bought
• Any residual position of a bank at the end of the day-over sold
• None of the above
• 1 & 2 both

##### Bond X and Bond Y have the same par value, coupon, maturity, and credit rating, but Bond X trades at a higher price than Bond Y. A possible reason for this difference is that:

Options are :

• Bond X has a higher expected loss in a default.
• Bond Y has a higher expected recovery rate in a default.
• the market expects a downgrade to Bond Y's credit rating.

##### An analyst has stated that, holding all else constant, an increase in the maturity of a coupon bond will increase its interest rate risk, and that a decrease in the coupon rate of a coupon bond will decrease its interest rate risk. The analyst is correct with respect to:

Options are :

• both of these effects.
• only one of these effects.
• neither of these effects.

Answer :only one of these effects.

##### Holding other factors constant, the interest rate risk of a coupon bond is higher when the bond's:

Options are :

• coupon rate is higher.
• yield to maturity is lower.
• current yield is higher.

Answer :yield to maturity is lower.

Options are :

• 1.820%.
• -1.820%.
• -0.018%.

##### The following is not a feature of a derivative instrument-

Options are :

• It is a financial instrument
• Its use always leads to profit
• It is executable on a future date
• Its pay-off is dependent on the value of any other basic variable

##### The following is not a feature of exchange-traded derivative -

Options are :

• It is a standard size
• It is available only on specified exchanges
• The seller is always a bank
• None of the above

Answer :The seller is always a bank

##### A bank has entered into an option forward contract with an export customer. That means -

Options are :

• The bank has the option to accept or not to accept delivery under the contract the customer has the option delivery or not to deliver foreign exchange under the contract
• The customer has the option to deliver the foreign exchange during the option period
• The bank has the option to accept foreign exchange under the contract during the option period

Answer :The bank has the option to accept foreign exchange under the contract during the option period

##### If the coupon payments are reinvested at the coupon rate during the life of a bond, then the yield to maturity:

Options are :

• is greater than the realized yield.
• is less than the realized yield.
• may be greater or less than the realized yield.

Answer :may be greater or less than the realized yield.

##### A feature of currency options that distinguishes it from other derivatives is

Options are :

• It carries premium to be paid upfront
• It is option to enter into the contract
• The buyer has only right, but no obligation to execute the contract
• The seller has the right, but no obligation to execute the contract

Answer :The buyer has only right, but no obligation to execute the contract

##### Which of the following bonds has the shortest duration? A bond with a:

Options are :

• 10-year maturity, 10% coupon rate.
• 10-year maturity, 6% coupon rate.
• 20-year maturity, 6% coupon rate.

Answer :10-year maturity, 10% coupon rate.

##### The following statement with respect to currency option is wrong-

Options are :

• Call option will be used by exporters
• Put option gives the buyer the right to sell the foreign currency
• Foreign currency – rupee option is available in India
• An American option can be executed on any day during its currency

Answer :Call option will be used by exporters

Options are :

• Forwards
• Futures
• Options
• Swaps