info@finstructor.in | Ph: +91 - 99202 22792 | www.finstructor.

in
2010 Finstructor. All Rights Reserved
FRM
PART I
EXPLANATIONS SAMPLE FRM PART I


2010 Finstructor. All Rights Reserved


Explanations - Sample - FRM Part I

Answer 1: Correct answer is A
The two-year spot rate: ((1+0.07)(1+0.074))
.5
- 1 = 0.072, or 7.2 percent.

Answer 2: Correct answer is C
The Treasury does not issue zero-coupon notes or bonds. That is why STRIPS were created. A 5-year
Treasury note can be stripped into 11 zero coupon securities, consisting of its 10 coupon payments and
the principal repayment. The U.S. Internal Revenue Service regards the accrued interest on a zero
coupon security as income on which the security holder must pay taxes even though he has not received
a cash interest payment.

Answer 3: Correct answer is B
Reinvestment risk is higher with high-coupon, short maturity bonds. Callable bonds have more
reinvestment risk than noncallable bonds, since their maturity can be shorter than the stated maturity
date.

Answer 4: Correct answer is C
PVBP = initial price price if yield changed by 1 bps.
Initial price: Price with change:
FV = 1000 FV = 1000
PMT = 80 PMT = 80
N = 18 N = 18
I/Y = 9% I/Y = 9.01
CPT PV = 912.44375 CPT PV = 911.6271
PVBP = 912.44375 911.6271 = 0.82
PVBP is always the absolute value.

Answer 5: Correct answer is D
Two up moves produce a stock price of 40 1.44 = 57.60 and a call value at the end of two periods of
20.60. An up and a down move leave the stock price unchanged at 40 and produce a call value of 3. Two
down moves result in the option being out of the money. The value of the call option is discounted back
one year and then discounted back again to today. The calculations are as follows:

2010 Finstructor. All Rights Reserved

C
+
= [20.6(0.67) + 3(0.33)] / 1.08 = 13.6962
C
-
= [3(0.67) + 0 (0.33)] / 1.08 = 1.8611
Call value today = [13.696(0.67) + 1.8611(0.33)] / 1.08 = 9.07

Answer 6: Correct answer is A
Callable bonds are called when interest rates have declined. A deferred call provision means that the
bond is initially not callable; it does not allow the investor to postpone having his bond called. Callable
bonds may be called at par. The indenture specifies the call premium and the rate at which the call
premium declines over time.

Answer 7: Correct answer is D
The MYRA loan has a value of:

The concessionality is then the difference between the original loan and the MYRA loan value = 100
99.003 = $0.997 million = $997,000.

Answer 8: Correct answer is D
The buyer of a bull spread buys the call with an exercise price below the current stock price and sells the
call option with an exercise price above the stock price. The cost of the strategy is the difference between
the cost of buying the option with the lower exercise price and selling the option with the higher exercise
price which is $7 - $3 = $4 to enter into this strategy.

Answer 9: Correct answer is A
The call option value will decrease since the payment of dividends reduces the value of the underlying,
and the value of a call is positively related to the value of the underlying.

Answer 10: Correct answer is C
An exchange-for-physicals involves an agreement between long and short contract holders to settle their
respective obligations by delivery and purchase of an asset. It is executed off the floor of the exchange
and reported to exchange officials who then cancel both positions.




CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or
services offered by Finstructor. CFA Institute, CFA and Chartered Financial Analyst are
trademarks owned by the CFA Institute.
GARP does not endorse, promote, review or warrant the accuracy of the products or services
offered by Finstructor of FRM related information, nor does it endorse any pass rates claimed
by the provider. Further, GARP is not responsible for any fees or costs paid by the user to
Finstructor nor is GARP responsible for any fees or costs of any person or entity providing any
services to Finstructor. Financial FRM, GARP and Global Association of Risk
Professionals are trademarks owned by the Global Association of Risk Professionals, Inc.
CAIAA does not endorse, promote, review or warrant the accuracy of the products or services
offered by Finstructor nor does it endorse any pass rates claimed by the provider. CAIAA is not
responsible for any fees or costs paid by the user to Finstructor nor is CAIAA responsible for
any fees or costs of any person or entity providing any services Finstructor. CAIA, CAIA
Association, Chartered Alternative Investment Analyst, and Chartered Alternative Investment
Analyst Association, are service marks and trademarks owned by CHARTERED
ALTERNATIVE INVESTMENT ANALYST ASSOCIATION, INC., of Amherst, Massachusetts,
and are used by permission.







info@finstructor.in | Ph: +91 - 99202 22792 | www.finstructor.in
2010 Finstructor. All Rights Reserved