PRM - PROFESSIONAL RISK MANAGER | FINAL EXAM
PREP 2026/2027 | QUESTIONS AND 100% VERIFIED
ANSWERS | 100% PASS GUARANTEE
1. Q: What is the time value of money?
ANSWER Money available now is worth more than the same
amount in the future due to its earning capacity.
2. Q: What is the difference between simple and compound
interest?
ANSWER Simple interest is earned only on principal; compound
interest is earned on principal and accumulated interest.
3. Q: What is a perpetuity?
ANSWER A stream of equal cash flows that continues forever.
4. Q: How do you calculate the present value of a perpetuity?
ANSWER Cash flow divided by the discount rate (
C/r
).
5. Q: What is an annuity?
ANSWER A series of equal payments made at regular intervals
over a specified period.
6. Q: What is a zero-coupon bond?
ANSWER A bond that pays no periodic interest, sold at a discount
to par.
7. Q: What is the par yield?
ANSWER The coupon rate that makes a bond's price equal to its
par value.
8. Q: What is the spot rate?
,ANSWER The yield on a zero-coupon bond for a specific maturity.
9. Q: What is a forward rate?
ANSWER An interest rate agreed upon today for a future period.
10. Q: What is bootstrapping?
ANSWER Creating a zero-coupon yield curve from the prices of
coupon-paying bonds.
11. Q: What is the difference between a clean and a dirty bond
price?
ANSWER Clean price excludes accrued interest; dirty price
includes it.
12. Q: What is accrued interest?
ANSWER Interest that has been earned but not yet paid since the
last coupon date.
13. Q: What is Macaulay Duration?
ANSWER The weighted average time to receive a bond's cash
flows, weighted by present value.
14. Q: What is Modified Duration?
ANSWER A measure of a bond's price sensitivity to yield changes
(
MacaulayDuration/(1+y/n)
).
15. Q: What is DV01?
ANSWER The dollar value change in a bond's price for a one
basis point change in yield.
16. Q: What is convexity?
ANSWER The rate of change of duration; it measures the
curvature of the price-yield relationship.
17. Q: Why is convexity desirable in bonds?
ANSWER It means the bond gains more when yields fall than it
loses when yields rise.
, 18. Q: What is a callable bond?
ANSWER A bond the issuer can redeem before maturity.
19. Q: How does a call feature affect a bond's price?
ANSWER It lowers the price compared to an equivalent non-
callable bond.
20. Q: What is negative convexity?
ANSWER When a bond's price appreciation is less than its
depreciation for equal yield changes (common in callable bonds).
21. Q: What is a puttable bond?
ANSWER A bond the holder can sell back to the issuer before
maturity.
22. Q: What is a mortgage-backed security (MBS)?
ANSWER A security backed by a pool of mortgages.
23. Q: What is prepayment risk in MBS?
ANSWER The risk that borrowers pay off mortgages early when
rates fall.
24. Q: What is a Collateralized Debt Obligation (CDO)?
ANSWER A structured asset-backed security divided into
tranches of varying risk.
25. Q: What is the equity tranche of a CDO?
ANSWER The first-loss piece that absorbs initial defaults; highest
risk, highest yield.
26. Q: What is a dividend discount model (DDM)?
ANSWER Valuing a stock by discounting its expected future
dividends.
27. Q: What is the Gordon Growth Model?
ANSWER A DDM assuming dividends grow at a constant rate
forever (
P=D
1
PREP 2026/2027 | QUESTIONS AND 100% VERIFIED
ANSWERS | 100% PASS GUARANTEE
1. Q: What is the time value of money?
ANSWER Money available now is worth more than the same
amount in the future due to its earning capacity.
2. Q: What is the difference between simple and compound
interest?
ANSWER Simple interest is earned only on principal; compound
interest is earned on principal and accumulated interest.
3. Q: What is a perpetuity?
ANSWER A stream of equal cash flows that continues forever.
4. Q: How do you calculate the present value of a perpetuity?
ANSWER Cash flow divided by the discount rate (
C/r
).
5. Q: What is an annuity?
ANSWER A series of equal payments made at regular intervals
over a specified period.
6. Q: What is a zero-coupon bond?
ANSWER A bond that pays no periodic interest, sold at a discount
to par.
7. Q: What is the par yield?
ANSWER The coupon rate that makes a bond's price equal to its
par value.
8. Q: What is the spot rate?
,ANSWER The yield on a zero-coupon bond for a specific maturity.
9. Q: What is a forward rate?
ANSWER An interest rate agreed upon today for a future period.
10. Q: What is bootstrapping?
ANSWER Creating a zero-coupon yield curve from the prices of
coupon-paying bonds.
11. Q: What is the difference between a clean and a dirty bond
price?
ANSWER Clean price excludes accrued interest; dirty price
includes it.
12. Q: What is accrued interest?
ANSWER Interest that has been earned but not yet paid since the
last coupon date.
13. Q: What is Macaulay Duration?
ANSWER The weighted average time to receive a bond's cash
flows, weighted by present value.
14. Q: What is Modified Duration?
ANSWER A measure of a bond's price sensitivity to yield changes
(
MacaulayDuration/(1+y/n)
).
15. Q: What is DV01?
ANSWER The dollar value change in a bond's price for a one
basis point change in yield.
16. Q: What is convexity?
ANSWER The rate of change of duration; it measures the
curvature of the price-yield relationship.
17. Q: Why is convexity desirable in bonds?
ANSWER It means the bond gains more when yields fall than it
loses when yields rise.
, 18. Q: What is a callable bond?
ANSWER A bond the issuer can redeem before maturity.
19. Q: How does a call feature affect a bond's price?
ANSWER It lowers the price compared to an equivalent non-
callable bond.
20. Q: What is negative convexity?
ANSWER When a bond's price appreciation is less than its
depreciation for equal yield changes (common in callable bonds).
21. Q: What is a puttable bond?
ANSWER A bond the holder can sell back to the issuer before
maturity.
22. Q: What is a mortgage-backed security (MBS)?
ANSWER A security backed by a pool of mortgages.
23. Q: What is prepayment risk in MBS?
ANSWER The risk that borrowers pay off mortgages early when
rates fall.
24. Q: What is a Collateralized Debt Obligation (CDO)?
ANSWER A structured asset-backed security divided into
tranches of varying risk.
25. Q: What is the equity tranche of a CDO?
ANSWER The first-loss piece that absorbs initial defaults; highest
risk, highest yield.
26. Q: What is a dividend discount model (DDM)?
ANSWER Valuing a stock by discounting its expected future
dividends.
27. Q: What is the Gordon Growth Model?
ANSWER A DDM assuming dividends grow at a constant rate
forever (
P=D
1
