Question

1. Consider a 20% annual level coupon bond of the face & redemption value of INR 1,000 with a term to maturity of two years. Assuming that relevant risk-adjusted interest rates for maturities of one year and two years are respectively 8% p.a. and 12% p.a. compounded annually, the intrinsic value (in INR) of the bond is closest to:

a. 1101
b. 1214
c. 928
d. 1142

2. A digital put option pays INR 3 if the spot price of the underlying asset finishes below its strike price at expiry, and a digital call pays INR 3 if spot is above its strike.
Let P be a digital put option with strike at K and C be a digital call struck at L both with maturities of one year.
If K>L and money has no time value i.e. risk-free interest rate is zero, the no-arbitrage value (in INR) of a portfolio consisting of one put and one call in an efficient market will be:
a. less than INR 3
b. not less than INR 3 but not greater than INR 6
c. greater than INR 6
d. equal to INR 3

3. We define yield to maturity as the single discount rate that equates the present value of all future cash flows from the bond to its current market price.
Consider a 12% annual level coupon bond of the face & redemption value of INR 1,000 with a term to maturity of two years. Assuming that the current market price of the bond is INR 928, its yield to maturity (in % p.a.) is closest to:
a. 15.33
b. 16.50
c. 14.82
d. 15.15

4. The coordinates of two assets A & B in risk-return space are respectively A(0,10) and B(6,6). Which of the following statements is true:
a. A is riskier than B on a standalone basis
b. There is an equilibrium between A & B in an efficient market
c. There would be greater demand for A will consequential price correction
d. There would be greater demand for B will consequential demand-supply realignment

5. X acquires a treasury bill at 99. The bill has a remaining maturity of 60 days. The difference between the effective annual yield on a 365 day basis and the banker’s discount yield (in % p.a.) is closest to:
a. 0.55
b. 0.42
c. 0.31
d. 0.22

6. X acquires a treasury bill at a banker’s discount yield of 9% p.a. The bill has a remaining maturity of 60 days. He holds the bill for 30 days and sells it off at a banker’s discount yield of 3% p.a. The effective annual yield (in % p.a.) on a 365 day basis earned by X is closest to:
a. 16.58
b. 6.00
c. 16.30
d. 15.50

7. Suppose we have six assets, A, B, C, D, E, F which pay off according to the roll of a fair die. If the die roll is equal to the asset's position in the above sequence (i.e. 1 corresponds to A, 2 corresponds to B and so on), it pays INR 1.00 and zero otherwise. The amount (in INR) that the set of all the assets will trade for is closest to:
a. 1.00
b. 1/6
c. 0
d. 6.00

8. A digital put option pays INR 1 if the spot price of the underlying asset finishes below its strike price at expiry, and a digital call pays INR 1 if spot is above its strike.
Let P be a digital put option with strike at K and C be a digital call struck at L both with maturities of one year.
If K=L and the risk free interest rate is 12% p.a. compounded continuously, the no arbitrage value (in INR) in an efficient market of a portfolio consisting of one put and one call will be closest to:
a. 2.00
b. 1.7738
c. 1.50
d. 0.8869

9. Bond X has a convertibility option that gives the holder of the bond the option (choice) to convert it into a share of the issuer at a stated point in time at a stated price. Bond Y is identical to X in all respects except for the absence of the convertibility option. Which of the following is true at equilibrium if the market in which these bonds are traded is perfectly efficient?
a. Bond Y will trade at a price at least equal to that of Bond X
b. Bond X will trade at a price at least equal to that of Bond Y
c. The prices of both bonds will be equal
d. Bond Y will invariably trade at a price higher than that of Bond X

10. Bond X is a level coupon bond of maturity 20 years whose payments of interest & repayment of principal are guaranteed by the Government i.e. it is a treasury bond.
Bond Y is also a level coupon bond of the same maturity & face/redemption value as Bond X except that it is a corporate bond issued by XYZ Ltd.
Both the bonds are trading at the same price.
Which of the following is true at equilibrium if the market in which these bonds are traded is perfectly efficient?
a. Bond Y has a coupon rate at least equal to that of Bond X
b. Bond X has a coupon rate at least equal to that of Bond Y
c. The coupon rates of both bonds will be equal
d. The required return of Bond X is higher than that for Bond Y

Answer 1

Answer:

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