QFC Quantitative Finance Modeling & Valuation 4

Question 1

Duration measures a bond's price sensitivity to interest rate changes. Which type of duration adjusts for the bond's yield to express sensitivity in absolute terms?

Accepted Answer

Modified duration

Answer

Modified duration = Macaulay duration / (1 + y/m), directly giving the approximate percentage price change per 1% yield move.

Question 2

The EV/EBITDA multiple is preferred over the P/E ratio for comparing companies with different capital structures because it is:

Accepted Answer

Independent of leverage and tax differences

Answer

EV/EBITDA is pre-interest and pre-tax, so leverage and tax policy do not distort comparisons across firms with different capital structures.

Question 3

In the Vasicek interest rate model, the short rate reverts to a long-run mean. What term describes this behavior?

Accepted Answer

Mean reversion

Answer

Vasicek's dr = κ(θ − r)dt + σdW features a drift that pulls the rate back toward the long-run level θ, which is mean reversion.

Question 4

Which technique is used in sensitivity analysis to identify which input variable has the greatest impact on a model's output?

Accepted Answer

Tornado chart analysis

Answer

A tornado chart ranks input variables by the range of output change they cause, with the widest bar (highest impact) at the top.

Question 5

In real options analysis, a firm has the option to expand a project at a future date. This option is most analogous to which financial derivative?

Accepted Answer

A call option

Answer

An expansion option grants the right (not obligation) to invest more capital if conditions are favorable, mirroring the payoff of a call option.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Quantitative Finance Modeling & Valuation 4