Insurance and Risk Management

161. A central bank wishes to indicate that its official interest rate will be 4.5% from tomorrow. What repurchase price should it set for 28 day repo deals in government bonds valued at £1m?

  1. £1,045,000
  2. £1,003,452
  3. £1,003,000
  4. £1,002,000
  5. £955,000

Correct answer: (B)
£1,003,452

162. A company has just declared a dividend of 8p per share on shares current valued at £1.50. Dividends have been growing steadily at 5 per cent p.a. The dividend yield on these shares is is:

  1. 5.6%
  2. 5.3%
  3. 13%
  4. 10.6%
  5. 10.3%

Correct answer: (B)
5.3%

163. A corporate bond paying an annual coupon of £9 matures for £100 on 30 September 2011. What is its price on 1 October 2008 if interest rates are 8.5 per cent?

  1. £102.56
  2. £61.29
  3. £101.28
  4. £101.97
  5. £102.26

Correct answer: (C)
£101.28

164. A downward sloping yield curve most likely indicates:

  1. The central bank has restricted short-term borrowing
  2. Low prices for long-dated bonds
  3. Investors have become capital risk averse
  4. Markets expect short-term rates to fall
  5. A strong demand for short-dated assets

Correct answer: (B)
Low prices for long-dated bonds

165. A firm announces that its next dividend payment will be 12p per share. The shares are currently priced at £1. The firm's earnings have recently grown at a rate of 9 per cent per year and this is expected to continue. The total annual return on these shares is:

  1. 21%
  2. 15%
  3. 9%
  4. 3%
  5. 12%

Correct answer: (A)
21%

166. A government sale of treasury bills to the central bank is the nearest thing in a modern economy to:

  1. Financing a government deficit
  2. Reducing the national debt
  3. Increasing the national debt
  4. Printing money
  5. Reducing liquidity

Correct answer: (A)
Financing a government deficit

167. A mutual fund manager shifts part of his portfolio from long-dated bonds to money market instruments even though yields are unchanged. Most likely he is expecting:

  1. A fall in the rate of inflation
  2. A reduction in the riskiness of bonds
  3. A rise in the exchange rate
  4. A fall in short-term interest rates
  5. A rise in long-term interest rates

Correct answer: (E)
A rise in long-term interest rates

168. A retirement annuity is particularly attractive to someone who has:

  1. High longevity risk
  2. A large family
  3. Financial myopia
  4. Low longevity risk
  5. A severe illness

Correct answer: (A)
High longevity risk

169. A share with a β-coefficient of 0.9 has a rate of return of 16%, when the whole market return is 17%. What return should it produce if the risk free rate rises from 7% to 8%, ceteris paribus.

  1. 16%
  2. 17%
  3. 23.3%
  4. 16.1%
  5. 22.3%

Correct answer: (B)
17%

170. A sudden demand by depositors for notes and coin is an example of:

  1. Payment risk
  2. Asset risk
  3. Capital risk
  4. Currency risk
  5. Liquidity risk

Correct answer: (E)
Liquidity risk

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