PRMIA 8006 Dumps Questions Answers

The investor's needs to sell futures contracts, as his current position is long. He needs to sell ($1,000,000 x (2.5-1)) / ($240,000 x 1.2) = 5.2 contracts, or rounded to 5 contracts.

It is important to note here that the investor wishes to retain a beta of 1, and does not want to get rid of all market exposure.

The profit potential from the conversion of convertible bonds into stock is limited by the issuer's option to call the security at short notice. Generally, the convertible debt security is convertible into a certain number of shares, and the debt holder will generally not convert the security to shares unless there is a profit to be made. The 'premium' is irrelevant, because as long as the premium exists, the debt holder has no incentive to convert, as he would be better off buying the shares in the market. It is only when share prices go beyond a level that it becomes advantageous convert the security into shares. However, the prospect of granting cheap shares to the debt holders is not too appealing to the issuer, and as soon as the share price goes beyond a point where the value of the shares exceeds the face value of the debt the issuer has an incentive to exercise its option to call the security.

Therefore the profit potential from the conversion of convertible bonds into shares is limited by the issuer's option to call the security, and Choice 'a' is the correct answer. The 'premium', or interest rates, or volatility are irrelevant.

On-the-run bonds yield less, and therefore are priced higher than similar off-the-run bonds. The difference in their pricing reflects the fact that on-the-run bonds are more liquid than off-the-run bonds. Therefore statements I and II are correct. Bonds are on-the-run when they are issued, and change hands frequently, and over time as they become 'seasoned', newer bonds take their place as on-the-run bonds making them off-the-run.

Strips are zero coupon instruments, and do not carry any coupon. Therefore statement III is not correct.

A lower bid-ask or bid-offer spread indicates lower transaction costs and is a result of greater liquidity. A higher bid-ask spread results for less liquid securities. Therefore statement IV is not correct.