8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

The price of a treasury bill can be calculated as [Future value / (1 + yield x days-to-maturity/365)] = 100/(1+5%*90/365) = $98.78.

A zero coupon bond has a Macaulay duration equal to its maturity, ie in this case 5 years. We can calculate modified duration from Macaulay duration by using the following relationship:

Modified duration = Macaulay duration/(1 + y) where y is the yield.

Therefore the correct answer is 5 / (1.05) = 4.76.

Or intuitively, all the other answers appear clearly incorrect: 5 and 5.25 are too high, and 4 is too low. Therefore the only reasonable choice is 4.76.

A utility function provides a description of an individual or a firm's risk attitude. It expresses how risk seeking or risk averse a firm or an individual is. The utility function would explain differences between risk seeking and risk averse behavior, for example, as an individual becomes richer, he may seek (or shun) risk more than before. A utility function incorporates all of this, and therefore Choice 'd' is the correct answer.