CFA insitute QUANTITATIVE METHODS
practice questions & answers.
HOW WOULD YOU
Estimate the default risk premium. ANS -Find two investments that are same in maturity but different in
default risk. Calculate the difference in return then subtract the liquidity premium
find the two investments that have the same maturity but different levels of default risk. Both
Investments 4 and 5 have a maturity of eight years. Investment 5, however, has low liquidity and thus
bears a liquidity premium. The difference between the interest rates of Investments 5 and 4 is 2.5
percentage points. The liquidity premium is 0.5 percentage point (from Part A). This leaves 2.5 − 0.5 =
2.0 percentage points that must represent a default risk premium reflecting Investment 5's high default
risk.
Give the future of cash flows inputs for this problem
A couple plans to set aside $20,000 per year in a conservative portfolio projected to earn 7 percent a
year. If they make their first savings contribution one year from now, how much will they have at the
end of 20 years? ANS -N 20
%i 7
PV n/a (= 0)
FV computeX
PMT$20,000
HOW WOULD YOU COMPUTE? What do you need to remember?
Two years from now, a client will receive the first of three annual payments of $20,000 from a small
business project. If she can earn 9 percent annually on her investments and plans to retire in six years,
how much will the three business project payments be worth at the time of her retirement? ANS -need
two TVM's
practice questions & answers.
HOW WOULD YOU
Estimate the default risk premium. ANS -Find two investments that are same in maturity but different in
default risk. Calculate the difference in return then subtract the liquidity premium
find the two investments that have the same maturity but different levels of default risk. Both
Investments 4 and 5 have a maturity of eight years. Investment 5, however, has low liquidity and thus
bears a liquidity premium. The difference between the interest rates of Investments 5 and 4 is 2.5
percentage points. The liquidity premium is 0.5 percentage point (from Part A). This leaves 2.5 − 0.5 =
2.0 percentage points that must represent a default risk premium reflecting Investment 5's high default
risk.
Give the future of cash flows inputs for this problem
A couple plans to set aside $20,000 per year in a conservative portfolio projected to earn 7 percent a
year. If they make their first savings contribution one year from now, how much will they have at the
end of 20 years? ANS -N 20
%i 7
PV n/a (= 0)
FV computeX
PMT$20,000
HOW WOULD YOU COMPUTE? What do you need to remember?
Two years from now, a client will receive the first of three annual payments of $20,000 from a small
business project. If she can earn 9 percent annually on her investments and plans to retire in six years,
how much will the three business project payments be worth at the time of her retirement? ANS -need
two TVM's
