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FRM
PART I
SAMPLE FRM PART I


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Sample - FRM Part I

Question 1
If the one-year spot rate is 7 percent and the one-year forward rate is 7.4 percent, what is the two-year
spot rate?
A) 7.20%.
B) 7.12 %.
C) 7.27%.
D) 7.40%.

Question 2
Which of the following statements regarding U.S. Treasury issues is least accurate?
A)
Investment bankers strip the coupons from Treasury notes and bonds to create zero-coupon
securities.
B) A 5-year Treasury note can be stripped into 11 different zero coupon securities.
C) The U.S. Treasury issues zero coupon notes, but not bonds.
D)
Due to the way Treasury STRIPS are taxed, U.S. investors may face negative cash flows
before the maturity date.

Question 3
Consider four bonds that are similar in all features except those shown. The bond with the greatest
reinvestment risk is:
A) 5% coupon, non-callable.
B) 15% coupon, callable.
C) 15% coupon, non-callable.
D) 5% coupon, callable.
Question 4
The price value of a basis point (PVBP) for a 18 year, 8 percent annual pay bond with a par value of
$1,000 and yield of 9 percent is closest to:
A) $0.44.
B) $0.63.
C) $0.82.
D) $0.80.


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Question 5
A stock is priced at 40 and the periodic risk-free rate of interest is 8 percent. What is the value of a two-
period European call option with a strike price of 37 on a share of stock using a binomial model with an up
factor of 1.20 and a (risk-neutral) up probability of 67 percent?
A) $20.60.
B) $3.57.
C) $9.25.
D) $9.07.

Question 6
Which of the following statements regarding callable bonds is most accurate? Callable bonds:
A)
typically require that the issuer pay a premium above par to call the issue, and the amount of
this premium usually declines as the bond approaches maturity.
B) are likely to be called when interest rates have increased.
C) that have a deferred call feature allow the bondholder to defer the call for up to 5 years.
D)
may not be called at par value--there must be at least a slight call premium to compensate the
holder for losing the bond.
Question 7
A multiyear restructuring agreement (MYRA) for a $100 million loan with a sovereign has the following
features: maturity extended from two to five years; principal amortization for four years at 25 percent per
year; grace period of one year; up-front fee of 1.25 percent; loan rate of 6 percent; and bank discount rate
of 6.75 percent. If the original loan had a value equal to its par, the concessionality attached to this MYRA
is closest to:
A) $52,570,000.
B) $98,924,000.
C) $47,430,000.
D) $997,000.
Question 8
Assume that the current price of a stock is $100. A call option on that stock with an exercise price of $97
costs $7. A call option on the stock with the same expiration and an exercise price of $103 costs $3.
Using these options what is the cost of entering into a long bull spread on this stock?
A) $1.
B) $0.
C) $7.
D) $4.


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Question 9
Rachel Barlow is a recent graduate of Columbia University with a Bachelors degree in finance. She has
accepted a position at a large investment bank, but first must complete an intensive training program to
gain experience in several of the investment banks areas of operations. Currently, she is spending three
months at her firm's Derivatives Trading desk. One of the traders, Jason Coleman, CFA, is acting as her
mentor, and will be giving her various assignments over the three month period.
One of the first projects he asks her to do is to compare different option trading strategies. Coleman
would like Barlow to pay particular attention to strategy costs and their potential payoffs. Barlow is not
very comfortable with option models, and knows she needs to be able to fully understand the most basic
concepts in order to move on. She decides that she must first investigate how to properly price European
and American style equity options. Coleman has given her software that provides a variety of analytical
information using three valuation approaches: the Black-Scholes model, the Binomial model, and Monte
Carlo simulation. Barlow has decided to begin her analysis using a variety of different scenarios to
evaluate option behavior. The data she will be using in her scenarios is provided in Exhibits 1 and 2. Note
that all of the rates and yields are on a continuous compounding basis.
Exhibit 1
Stock Price (S) $100
Strike Price (X) $100
Interest Rate (r) 7%
Dividend Yield (q) 0%
Time to Maturity
(years)
0.5
Volatility (Std. Dev.) 20%
Exhibit 2
Stock Price (S) $110
Strike Price (X) $100
Interest Rate (r) 7%
Dividend Yield (q) 0%
Time to Maturity
(years)
0.5
Volatility (Std. Dev.) 20%
Value of European
Call
$14.8445
Barlow notices that the stock in Exhibit 1 does not pay dividends. If the stock begins to pay a dividend,
how will the price of a call option on that stock be affected?
A) Decrease.
B) Increase.
C) Be unchanged.
D) Increase or decrease.


2010 Finstructor. All Rights Reserved


Question 10
An exchange-for-physicals, as it pertains to futures contracts:
A) is another term for delivering an asset to satisfy a futures contract.
B) is another term for accepting delivery of an asset to satisfy a futures contract.
C) involves an agreement off the floor of the exchange.
D) is not permitted for financial futures.







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