BMO Advanced Techniques & Methods 3

Question 1

BMO's treasury team is evaluating two bonds with identical coupons but different maturities. Which bond will experience a greater price change if interest rates rise by 1%?

Accepted Answer

The longer-maturity bond, due to greater duration

Answer

Longer-maturity bonds have greater duration, meaning they are more sensitive to interest rate changes.

Question 2

A BMO commercial banker calculates the Debt Service Coverage Ratio (DSCR) for a real estate loan applicant. Net Operating Income is $500,000 and annual debt service is $400,000. What is the DSCR?

Accepted Answer

1.25

Answer

DSCR = Net Operating Income ÷ Annual Debt Service = $500,000 ÷ $400,000 = 1.25.

Question 3

In BMO's risk management framework, Value at Risk (VaR) at the 99% confidence level over 10 days is $5 million. How should this be interpreted?

Accepted Answer

There is a 1% chance of losing more than $5 million over the next 10 days

Answer

VaR at 99% confidence means there is a 1% probability that losses will exceed the stated amount over the specified period.

Question 4

BMO's M&A team is comparing acquisition targets using the EV/EBITDA multiple. Why is EV/EBITDA preferred over P/E for cross-border comparisons?

Accepted Answer

EV/EBITDA is unaffected by differences in capital structure, taxes, and depreciation policies

Answer

EV/EBITDA neutralizes the effects of capital structure, tax rates, and accounting depreciation choices, making it more comparable across countries.

Question 5

When constructing an efficient frontier for a client portfolio, a BMO wealth advisor finds the optimal portfolio. What characteristic defines the portfolio on the efficient frontier with the highest Sharpe ratio?

Accepted Answer

The market portfolio that maximizes risk-adjusted return

Answer

The tangency portfolio on the efficient frontier has the highest Sharpe ratio, representing the best risk-adjusted return relative to the risk-free rate.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Advanced Techniques & Methods 3