Pre-Course Test

5/12/2020 Pre-Course Test | Pre-Course Test | FMAx Courseware | edX
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Course
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Pre-Course Test
Thank you for taking this short test before you start your learning!
As the FMAx is intended as an entry–level course on finance for macroeconomists, we are

interested in finding out exactly how much prior knowledge you have as you initiate the
course. Also, your answers will allow us to better target the course material to your needs.
Note that this test does not affect your final grade, but can provide good practice for
answering the types of graded questions that you’ll be getting later in the course.
Please do not become discouraged if you do not know some answers. We can assure you
that, once you take this course, you will have increased your knowledge in each of the topic
areas.
Thank you for taking the time to help us improve the course and your learning experience.
Test Instructions:
Please carefully read through each question and respond as instructed. We have provided
the Excel file “Pre–Course Quiz.xlsx” to assist in answering the numerical questions. When
answering a multiple choice question, choose only one option.
https://courses.edx.org/courses/course-v1:IMFx+FMAx+2T2020/courseware/88febc21f7c3412ca7ea2fea615ebf3c/01293ec311e64aa2aaedfd0f… 1/14
Note: Once your calculations are completed, please enter your answer in the form field using
two decimal
right places.
shows the For answers
time remaining thatToare
in the exam. in terms
receive of dollars, your answers should be in the
credit for
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form 314.63you(without
must selectthe
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$), and for problem
answers before you
in terms of percentages (rates), the answers
should be in the form 12.84% (with a %). For answers with more than three digits to the left of
the decimal place, do not enter a comma. Unless otherwise indicated, assume that 1
year = 365 days.
Modules 0–1 —
Question 1
1/1 point (graded)
Suppose there is no uncertainty. There is an investment plan in which you pay $100 in t and
receive $5 in t+1 and $105 in t+2. Which of the following should the yield to maturity, i,
satisfy?
Submit You have used 1 of 1 attempt
Question 2
0/1right
pointshows the time remaining in the exam. To receive credit for
(graded)
problems, you must select "Submit" for each problem before you
Depending on the market convention, yields can be quoted on a yield (Y) or discount (D)
basis. For the same instrument, which of the following is true?
(Hint: if you don’t know the answer immediately, think of an example of a simple one-period
zero coupon bond)
Y is always greater
D is always greater
Y and D are equal
It depends; sometimes Y can be greater, sometimes D can be greater
Question 3
1/1 point (graded)
Bond L: 2-year zero coupon bond, pays $250 at maturity
Bond M: 1- year zero coupon bond, pays $25 at maturity
Bond N: 2-years, 10% coupon (paid annually) bond, face value = $250
Suppose you combine Bonds L and M to produce a Portfolio LM, and that the Yield to Maturity is the
same for all three bonds and the portfolio considered. Which of the following is true?
Price of LM > Price of N
Price of LM = Price of N
Price of LM < Price of N
Cannot determine if one price is greater than another without further information
Modules 2–3 —
Directions:
problems, youUse
mustthe Excel
select Filefor
"Submit" provided to answer
each problem before youQuestions 4–7.
Question 4
1/1 point (graded)
What is the price of the following US T-Bond? (Use any method you prefer, and enter your
answer with two decimal places)
Face value : $100
Maturity: 6 years
Coupon rate 3% (paid annually)
Yield = 7.6%
78.47
78.47
Question 5
0/1 point (graded)
Suppose you observe that the above bond is trading at $83.00. What is the yield? (Enter your answer as
a percentage with the % sign, with two decimal places)
3.15
3.15
Question 6
0.0/1.0 point (graded)
Calculate the price, duration, and modified duration of this bond when the yield is 9% (Enter
all answers with two decimal places).
Price:
Duration:
Modified Duration:
Question 7
1 point possible (graded)
Suppose the yield for the bond from the previous question increases by 1½ percentage
points. Without re-calculating the price, what is the expected change (in %) in the bond’s
price? That is, what is the expected change using the Duration approximation? (Enter your
answer in percentage with the % sign and with two decimal places).
Expected change:
Question 8
0/1 point (graded)
I have a portfolio consisting of long positions in each of the three bonds: Bond A (duration = 2), Bond
You are taking
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and Bond Test" as a timed
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Duration of the portfolio = 4.3
Duration of the portfolio = 2.0
Duration of the portfolio > Duration of bonds A and B
Question 9
0/1 point (graded)
A certain investor, who will hold a bond to maturity and cares only about the return to his
investment, must choose among three different 5-year sovereign bonds issued by the
Republic of Fredonia: (i) a premium bond, (ii) a discount bond, (iii) a par bond.
Which of the following is true about the investor’s preferences?
He will prefer the premium bond over the other two, because it is more valuable
He will prefer the discount bond, because it is cheaper
He will prefer the par bond, because it is appropriately priced
He will be indifferent to all three, because they are equivalent in his analysis
Module 4 —
Question 10
1/1 point (graded)

You are taking
Yesterday "Pre-Course
the yield Test"(YTM)
to maturity as a timed exam. The
increased bytimer
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the Exam 98:27:40
price of my bond fell by
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problems, If YTM increases
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each problem basis points,
you then the price of my bond will…
Remain constant
Fall by 3%
Fall by > 3%
Fall by < 3%
Increase by 3%
Increase by < 3%
Question 11
0/1 point (graded)
Historically in the U.S., which of the following has always been true?
Yield on a 2-year corporate bond > yield on a 2-year Treasury bond.
Yield on a 3-year corporate bond > yield on a 2-year corporate bond.
Yield on a 3-year Treasury bond > yield on a 2-year Treasury bond
Yield on a 3-year corporate bond > yield on a 5-year Treasury bond.
All of the above.
Statements (a) and (c)
Question 12
0/1 point (graded)

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are taking
curve"Pre-Course
is commonly Test" as a timed exam.from
constructed The timer on the (risk-free)
benchmark End Myzero
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yields at
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problems,maturities, or y"Submit"
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problem before you to the maturity. Once a yield curve is
constructed, a “forward”
select "End My curve
Exam". Show Lesscan also be constructed, consisting of short (for example 1-
year) rates fi’s.
Which of the following describes accurately the relationship between zero and forward yields?
Zeros (yi’s) are arithmetic averages over forward rates (fi’s)
Each yi is the sum of fi’s at shorter maturities
yi’s are geometric averages over fi’s
yi’s are always greater than or equal to the corresponding fi
None of the above
Module 5 —
Directions: Use the Excel File provided to answer Question 13.
Question 13
Today is January 1st, 2016. Fabregas, Inc. is projecting earnings per share (EPS) of $4.50 for
January 1st, 2017. It plans to pay out 25% of its earnings in dividends, and management is
confident that its ROE of 10.5% on new investments can be maintained over a reasonably
long horizon.
The expected market return is 7%, Fabregas, Inc. has a Beta of 1.3, and the risk-free rate is
0.5%. For Fabregas, Inc. calculate the market capitalization rate, the growth rate of earnings,
and today’s price and P-E ratio(calculated as the ratio of today’s price to expected earnings
on January 1st, 2017).
(Enter all answers with two decimal places and, if a percentage, the % sign).
Market capitalization rate:
Growth rate of earnings:
Price:
P-E:
Question 14
If Fabregas management decides to postpone dividend payouts until January 1st, 2020, and
will distribute them thereafter at 25% of earnings, the P-E ratio calculated in the previous
question will…
(No calculations needed)
Increase
Decrease
Remain constant
Cannot be determined without further information
Submit
You You have used
are taking "Pre-Course 0 ofas1aattempt
Test" timed exam. The timer on the End My Exam 98:27:40
Question 15
The price-earnings ratio (PE) is often used as a gauge of “how high” valuations are for
individual companies and markets. Suppose you are looking at stock market indices for two
emerging countries, Macronia and Fiscalia. You notice that PE in Macronia is higher than in
Fiscalia.
Assuming that PE is reflecting fundamentals in each of the countries, what could explain this
difference?
The market in Macronia is riskier than the one in Fiscalia.
Corporate earnings are higher in Fiscalia.
The projected growth rate of earnings is higher in Fiscalia.
On average, listed firms in Macronia pay out a greater portion of earnings in dividends
than do listed firms in Fiscalia.
Productive investments are more profitable in Macronia.
None of the above
Module 6 —
Question 16
1/1 point (graded)
I am interested in constructing the best possible portfolio from a set of securities, S1, S2, and
S3, each of which has an expected return E(r) and volatility or risk σ. Below I see their risk-
return characteristics:
https://courses.edx.org/courses/course-v1:IMFx+FMAx+2T2020/courseware/88febc21f7c3412ca7ea2fea615ebf3c/01293ec311e64aa2aaedfd0… 10/14
Which of the following is true?
I will choose S3 only, since it has the highest expected return.
I will always choose a portfolio that contains some amount of all three securities.
I will discard S2, because it has lower return and higher risk than S1.
I will choose S1 only, because it has high return with low risk.
I cannot discard any of the above securities without more information.
Question 17
1/1 point (graded)
Suppose the risk-free rate is 0.5%. Rank the three securities according to the slope of their
Capital Allocation Line, that is, their Sharpe ratio:
(You can use the Excel file to facilitate your calculations)
S1, S2, S3
S3, S2, S1
S2, S3, S1
S3, S1, S2
S2, S1, S3
Submit
You You have used
are taking "Pre-Course 1 ofas1aattempt
Test" timed exam. The timer on the End My Exam 98:27:40
Question 18
0/1 point (graded)
Which of the following statements is true regarding benefits from diversification:
I will always achieve risk reduction by including additional assets to my portfolio
I will only achieve benefits from diversification if I include additional assets that are
negative correlated with those already in my portfolio
If I have a portfolio composed of relatively low-risk assets, I gain nothing in terms of

risk reduction by including riskier assets
If n > m, then a portfolio composed of n assets will always outperform a portfolio

composed of m assets
None of the above
Module 7 —
Question 19
0/1 point (graded)
I hold a portfolio of international stocks and bonds which is worth $1 million today. I just
calculated its Value at Risk at the 99% level for a horizon of 10 days: it is equal to $75,000.
This means that…
Over the next 10 days, I have a 99% probability of losing exactly $75,000.
Over the next 10 days, I have a 1% probability of losing exactly $75,000.
Over the next 10 days, I have a 99% probability of losing at least $75,000.
Over the next 10 days, I have a 1% probability of losing at least $75,000.
You Over the"Pre-Course

are taking next 100 days,
Test" ason one exam.
a timed day IThe
willtimer
make on a
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exactly $75,000. 98:27:40
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select of the
"End My above.
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Directions: Use the Excel File provided to answer Questions 20–22.
Question 20
Note the 100 observations of monthly stock returns for the countries of Fiscalia and Monetaria
between October 2005 and January 2014. Assuming an investment of $500,000 in each of
these markets, calculate Value at Risk at the 95% level for each market, using the actual
distribution of returns, that is, the historical approach. (Enter your answers as positive losses
in $, with no decimal places and the number only with no , or $ sign)
VaR Fiscalia Stock Market:
VaR Monetaria Stock Market:
Question 21
Now calculate the average return and standard deviation in each market, then use the Normal
Approximation to calculate the 95% Value at Risk. (As in the previous question, enter your
answers as positive losses in $, with no decimal places and the number only with no , or $
sign).
VaR Fiscalia Stock Market:

VaR Monetaria Stock Market:
Question 22
Calculate the correlation between the two markets. Suppose you combine $500,000 invested
in each market to construct a portfolio MF of $1 million invested equally in the two markets.
Based on your calculations, which of the following is true?
VaR(MF) = VaR(Monetaria) + VaR(Fiscalia)
VaR(MF) < VaR(Monetaria) + VaR(Fiscalia)
VaR(MF) > VaR(Monetaria) + VaR(Fiscalia)
Depending on market conditions, VaR(MF) can be =, > or < the sum of the individual
VaRs.

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5/12/2020 Pre-Course Test | Pre-Course Test | FMAx Courseware | edX

Upgrade by May 16 and save 15% [$21.25 $25]

As the FMAx is intended as an entry–level course on finance for macroeconomists, we are

Submit You have used 1 of 1 attempt

Y and D are equal

It depends; sometimes Y can be greater, sometimes D can be greater

Submit You have used 1 of 1 attempt

Price of LM > Price of N

Price of LM < Price of N

Submit You have used 1 of 1 attempt

Face value : $100

Coupon rate 3% (paid annually)

Submit You have used 1 of 1 attempt

Submit You have used 1 of 1 attempt

Submit You have used 0 of 1 attempt

Submit You have used 0 of 1 attempt

All three bonds are coupon bonds

Duration of the portfolio = 4.3

Duration of the portfolio = 2.0

Duration of the portfolio > Duration of bonds A and B

Submit You have used 1 of 1 attempt

Which of the following is true about the investor’s preferences?

He will prefer the discount bond, because it is cheaper

He will prefer the par bond, because it is appropriately priced

Submit You have used 1 of 1 attempt

1/1 point (graded)

Submit You have used 1 of 1 attempt

Yield on a 2-year corporate bond > yield on a 2-year Treasury bond.

Yield on a 3-year corporate bond > yield on a 2-year corporate bond.

Yield on a 3-year Treasury bond > yield on a 2-year Treasury bond

Yield on a 3-year corporate bond > yield on a 5-year Treasury bond.

All of the above.

Statements (a) and (c)

Submit You have used 1 of 1 attempt

0/1 point (graded)

Zeros (yi’s) are arithmetic averages over forward rates (fi’s)

Each yi is the sum of fi’s at shorter maturities

yi’s are geometric averages over fi’s

yi’s are always greater than or equal to the corresponding fi

None of the above

Submit You have used 1 of 1 attempt

Market capitalization rate:

Growth rate of earnings:

Submit You have used 0 of 1 attempt

(No calculations needed)

Cannot be determined without further information

The market in Macronia is riskier than the one in Fiscalia.

Corporate earnings are higher in Fiscalia.

The projected growth rate of earnings is higher in Fiscalia.

Productive investments are more profitable in Macronia.

None of the above

Submit You have used 0 of 1 attempt

Which of the following is true?

I will choose S3 only, since it has the highest expected return.

I cannot discard any of the above securities without more information.

Submit You have used 1 of 1 attempt

(You can use the Excel file to facilitate your calculations)

I will always achieve risk reduction by including additional assets to my portfolio

If I have a portfolio composed of relatively low-risk assets, I gain nothing in terms of

If n > m, then a portfolio composed of n assets will always outperform a portfolio

None of the above

Submit You have used 1 of 1 attempt

Over the next 10 days, I have a 1% probability of losing exactly $75,000.