322mtf04 - Name: SID: HADM 322 MIDTERM FALL 2004: OCTOBER...

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Name: SID: HA DM 322 M IDTERM F ALL 2004: O CTOBER 7, 2004 This year’s class differs from years before in that the theory section of the course is essentially separated from the practical application part of the course. This exam will act as a bridge in that it will test your skills and will foreshadow many of the actual exercises we will pursue later in the course. In particular, this exam will focus on your ability to apply your skills in a practical setting. 1. You will have exactly 3 hours for this exam. Please take care to use your time wisely as some questions are lengthier than others. You will be asked for short answer responses— be concise . Use of bullet points will suffice; you need not present answers in a full essay format. In most cases, 2 or 3 sentences will suffice. Any failure to turn in your response IMMEDIATELY when instructed to at the conclusion of the exam will result in a PENALTY. 2. The exam has 7 sections. All Sections except the Bonus are worth the same amount: 40 pts each. Bonus is worth 30. 3. Please make all responses in your whitebooks; turn in your whitebook and your 8.5x11 crib sheet when you have completed. Make sure your name is on everything you turn in. You may keep the test questions. Only responses in your whitebooks will be considered . 4. One-side of an 8.5x11 sheet of paper is all the outside help you will be afforded. You must hand in this crib sheet with your exam. The use of spreadsheet applications, additional outside assistance or materials of any kind, including that of another student, is strictly prohibited and will be dealt with as a violation of the Code of Academic Integrity. Penalties may include failure in this class and expulsion. Your participation in this exercise and any grade granted for it presupposes and is conditional on acceptance of the aforementioned conditions.
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P ART I: G ENERAL C ONCEPTS [8 P TS E A /40 T OTAL ] Assumptions vs the Real World. 1. Efficient, perfect, and complete markets are our first and most important market assumptions. They also happen to be assumptions that do not hold true in real life. Explain how financial institutions help to make those assumptions closer to the truth. 2. Modified duration is an imperfect estimate of interest rate sensitivity. Give at least two reasons why duration hedging (creating a portfolio that has a net duration of zero) may be ineffective in eliminating interest rate risk and explain. 3.
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322mtf04 - Name: SID: HADM 322 MIDTERM FALL 2004: OCTOBER...

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