Free GARP FRM Part I Financial Markets and Products Practice Questions

Financial Markets and Products is the largest Part I area at 30% of GARP FRM Part I (GARP). Questions cover banks, insurers and pension plans, fund management, derivatives markets and central clearing, hedging with futures, foreign exchange, pricing financial and commodity forwards and futures, options (properties, trading strategies, exotics), interest rates, corporate bonds, mortgages and mortgage-backed securities, interest rate futures, and swaps.

283 questions 88 easy 126 medium 69 hard 2026 syllabus

Sample Questions

Question 1 Easy
What is the Macaulay duration of a 5-year zero-coupon bond?
Solution
D is correct. Macaulay duration is the weighted average time to cash flows, where the weights are the present values of each cash flow as a fraction of price. A zero-coupon bond has a single cash flow at maturity, so 100% of the weight sits at year 5. Macaulay duration therefore equals the maturity: 5.00 years.
Question 2 Medium
A 7-year zero-coupon bond is priced to yield 5% on a continuously compounded basis. What is its Macaulay duration?
Solution
C is correct. Macaulay duration is the weighted average time to cash flows, where weights are the present values of each cash flow as a share of price. A zero-coupon bond has only one cash flow at maturity, so 100% of the weight sits at year 7. Therefore the Macaulay duration of a 7-year zero is exactly 7 years, regardless of the yield.
Question 3 Hard
A bond currently trades at par ($100), with a modified duration of 6.5 and convexity of 80. Yields are expected to fall by 75 basis points. Using the duration-plus-convexity approximation, estimate the new bond price.
Solution
A is correct. The second-order Taylor expansion of bond price with respect to yield is ΔPP≈−Dmod⋅Δy+12⋅C⋅(Δy)2.\frac{\Delta P}{P} \approx -D_{\text{mod}} \cdot \Delta y + \tfrac{1}{2} \cdot C \cdot (\Delta y)^2. With Δy=−0.0075\Delta y = -0.0075, Dmod=6.5D_{\text{mod}} = 6.5, and C=80C = 80: ΔPP≈−6.5⋅(−0.0075)+0.5⋅80⋅(0.0075)2=0.04875+0.00225=0.05100.\frac{\Delta P}{P} \approx -6.5 \cdot (-0.0075) + 0.5 \cdot 80 \cdot (0.0075)^2 = 0.04875 + 0.00225 = 0.05100. The convexity term adds 0.225% on top of the 4.875% duration estimate. Applying this to the par price: Pnew≈100⋅(1+0.0510)=$105.10.P_{\text{new}} \approx 100 \cdot (1 + 0.0510) = \$105.10.
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