8013 PRMIA PRM Exam 1: Finance Foundations Free Practice Exam Questions (2025 Updated)

Since the zero coupon bond has no interim interest payments, its only cash flow is the final payment upon maturity. This would be identical to the spot rate from now till t years, where t is the maturity of the bond.

Forward rates are marginal rates that apply to individual years in a multi-period context. Short rates refer to short term interest rates in money market futures contracts. A zero coupon bond has no coupon.

Over the counter and electronic communication networks match buyers and sellers. However, there is no market making function, ie, in periods of stress liquidity may completely disappear from thesemarkets. Exchanges normally have market makers that are required to present two way quotes on the securities they are making the market for. Therefore Choice 'a' is the correct answer.

Open interest refers to the number of outstanding contracts, which is the same as the number of long positions or short positions held by market participants. Note that since for every long futures contract position held there is a seller who holds the short side, the open interest that is long is identical to the open interest that is short. (This is unlike the spot market where one could have long positions without anyone else needing to be symmetrically short).

The total number of contracts traded refers to traded volumes, and not open interest. Other choices are irrelevant in the context.

To solve this question, we need to revisit how delta is calculated in a single step binomial model:

Consider a portfolio with just two positions: 1 Long Call option, and Δ Short Stock. We do not know what Δ (Delta) is.

Now if the current price of the stock is P, which can take the value P2 (higher value) and P1 (lower value) in the future at time T, then Δ needs to be such that the value of the portfolio is equal in both the cases. If the price goes up, the value of the option will be $1 (given) and the value of the short stock will be -Δ P2. If the price goes down, the value of the option will be $0, and the value of the stock will be -Δ P1.

Therefore, $1 - Δ P2 = $0 - Δ P1.

Solving for Δ, we get Δ = $1 /(P2 - P1) = $1 / ($102-$98) = 1/4.

Choice 'b' represents a correct description of a bullet bond. All other choices are incorrect.