Question 1

If interest rates fall, an interest rate cap would expire unexercised.

Accepted Answer

A) True 
 B)False  True

Question 2

Exhibit 23.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Exclusive Industries has debentures outstanding (par value $1,000.00) convertible into exclusive's common stock at $30. The coupon rate is 11% payable semiannually and they mature in 10 years.
-Refer to Exhibit 23.5. Calculate the conversion value if the stock price is $24.00 per share.

Accepted Answer

A) $600.00 
B) $700.00 
C) $800.00 
D) $900.00 
E) $1,000.00 
A) $600.00 
B) $700.00 
C) $800.00 
D) $900.00 
E) $1,000.00 C

Question 3

The conversion price parity for a convertible bond is defined as:

Accepted Answer

A) Market Price of Convertible Bond/Conversion Ration. 
B) Market Price of Convertible Bond *Conversion Ration. 
C) Market Price of Convertible Bond - Conversion Ration. 
D) Market Price of Convertible Bond + Conversion Ration. 
E) None of the above. 
A) Market Price of Convertible Bond/Conversion Ration. 
B) Market Price of Convertible Bond *Conversion Ration. 
C) Market Price of Convertible Bond - Conversion Ration. 
D) Market Price of Convertible Bond + Conversion Ration. 
E) None of the above. A

Question 4

Exhibit 23.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000 barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The nature of PU's business is such that they will financially suffer if they have to pay more than an average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below:
  
-Refer to Exhibit 23.4. Describe the transaction that occurs between PU and the swap dealer if the monthly average oil futures settlement price is $55.50.

Accepted Answer

A) PU pays the swap dealer $850,000. 
B) The swap dealer pays PU $1,000,000. 
C) PU pays the swap dealer $1,000,000. 
D) The swap dealer pays PU $850,000. 
E) None of the above. 
A) PU pays the swap dealer $850,000. 
B) The swap dealer pays PU $1,000,000. 
C) PU pays the swap dealer $1,000,000. 
D) The swap dealer pays PU $850,000. 
E) None of the above.

Question 5

Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 * 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Refer to Exhibit 23.10. How much compensation does the dealer receive for transaction costs, credit risk and other costs associated with matching the FRA's?

Accepted Answer

A) $42,700 
B) $62,500 
C) $82,000 
D) $96,300 
E) None of the above 
A) $42,700 
B) $62,500 
C) $82,000 
D) $96,300 
E) None of the above

Question 6

Exhibit 23.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An international investment firm buys an interest rate cap that pays the difference between LIBOR and 6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the settlement is every 3 months. Assume a 360 day year.
-Refer to Exhibit 23.8. Find the payoff if LIBOR closes at 6.3%.

Accepted Answer

A) -$45,000 
B) -$11,250 
C) $0 
D) $11,250 
E) $45,000 
A) -$45,000 
B) -$11,250 
C) $0 
D) $11,250 
E) $45,000

Question 7

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

Accepted Answer

A) Total return swap. 
B) Credit default swap. 
C) Collar. 
D) Forward rate agreement. 
E) Swap agreement. 
A) Total return swap. 
B) Credit default swap. 
C) Collar. 
D) Forward rate agreement. 
E) Swap agreement.

Question 8

Convertibles provide the upside potential of common stock and the downside protection of a bond.

Accepted Answer

A) True 
 B)False

Question 9

A warrant is an option to buy a stated number of shares of common stock at a specified price at any time during the life of the warrant.

Accepted Answer

A) True 
 B)False

Question 10

Exhibit 23.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month issues. As the Treasurer, you are concerned that interest rates will rise over the next three months and the rate upon which the second payment will be based will be undesirable. (The amount of Chimichango's first payment will be known at origination.) To reduce the company's interest rate exposure, you decide to purchase a 3 * 6 FRA whereby you pay the dealer's quoted fixed rate of 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 23.3. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Chimichango.

Accepted Answer

A) The dealer is obligated to pay Chimichango $38,750. 
B) The dealer is obligated to pay Chimichango $31,250. 
C) Chimichango is obligated to pay the dealer $38,750. 
D) Chimichango is obligated to pay the dealer $31,250. 
E) None of the above. 
A) The dealer is obligated to pay Chimichango $38,750. 
B) The dealer is obligated to pay Chimichango $31,250. 
C) Chimichango is obligated to pay the dealer $38,750. 
D) Chimichango is obligated to pay the dealer $31,250. 
E) None of the above.

Question 11

The intrinsic value of a warrant is calculated as:

Accepted Answer

A) (Market price of common stock + Warrant exercise price) + Number of shares specified by warrant. 
B) (Market price of common stock - Warrant exercise price) * Number of shares specified by warrant. 
C) (Market price of common stock + Warrant exercise price)/Number of shares specified by warrant. 
D) (Market price of common stock - Warrant exercise price)/Number of shares specified by warrant. 
E) None of the above. 
A) (Market price of common stock + Warrant exercise price) + Number of shares specified by warrant. 
B) (Market price of common stock - Warrant exercise price) * Number of shares specified by warrant. 
C) (Market price of common stock + Warrant exercise price)/Number of shares specified by warrant. 
D) (Market price of common stock - Warrant exercise price)/Number of shares specified by warrant. 
E) None of the above.

Question 12

The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price)* Number of shares specified by the warrant.

Accepted Answer

A) True 
 B)False

Question 13

The following are all advantages of having an equity swap market except

Accepted Answer

A) These agreements allow investors to take advantage of overall price movements in a specific country's stock market. 
B) Creating a direct equity investment in a foreign country may be difficult for some investors where it is prohibited by law. 
C) These agreements eliminate the need for a counterparty because they are traded on the NYSE. 
D) An investment fund wanting to accumulate foreign index returns denominated in their domestic currency may not be legally permitted to obtain sufficient exchange-traded derivative contracts to hedge a direct equity investment. 
E) All of the above are advantages of an equity swap market 
A) These agreements allow investors to take advantage of overall price movements in a specific country's stock market. 
B) Creating a direct equity investment in a foreign country may be difficult for some investors where it is prohibited by law. 
C) These agreements eliminate the need for a counterparty because they are traded on the NYSE. 
D) An investment fund wanting to accumulate foreign index returns denominated in their domestic currency may not be legally permitted to obtain sufficient exchange-traded derivative contracts to hedge a direct equity investment. 
E) All of the above are advantages of an equity swap market

Question 14

Exhibit 23.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
-Refer to Exhibit 23.9. Assuming that one year after the swap was initiated the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of the 7.5% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.

Accepted Answer

A) $101.33 
B) $100.92 
C) $100.00 
D) $98.67 
E) $95.83 
A) $101.33 
B) $100.92 
C) $100.00 
D) $98.67 
E) $95.83

Question 15

A plain vanilla swap agreement is used in similar situations as a forward rate agreement.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is not a characteristic of warrants?

Accepted Answer

A) They are sweeteners added to other security issues. 
B) After the initial sale, warrants are detachable. 
C) They pay no dividends. 
D) They provide no voting rights. 
E) No dilution protection is offered in the event of stock dividends or stock splits. 
A) They are sweeteners added to other security issues. 
B) After the initial sale, warrants are detachable. 
C) They pay no dividends. 
D) They provide no voting rights. 
E) No dilution protection is offered in the event of stock dividends or stock splits.

Question 17

In convertible bonds, the value of the common stock price upon immediate conversion is the

Accepted Answer

A) Put-call parity price. 
B) Conversion parity price. 
C) Cash equivalent price. 
D) Convertible price. 
E) Redemption price. 
A) Put-call parity price. 
B) Conversion parity price. 
C) Cash equivalent price. 
D) Convertible price. 
E) Redemption price.

Question 18

Exhibit 23.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month issues. As the Treasurer, you are concerned that interest rates will rise over the next three months and the rate upon which the second payment will be based will be undesirable. (The amount of Chimichango's first payment will be known at origination.) To reduce the company's interest rate exposure, you decide to purchase a 3 * 6 FRA whereby you pay the dealer's quoted fixed rate of 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 23.3. How much compensation does the dealer receive for transaction costs, credit risk and other costs associated with matching the FRA's?

Accepted Answer

A) $30,000 
B) $31,250 
C) $7,500 
D) $5,000 
E) None of the above 
A) $30,000 
B) $31,250 
C) $7,500 
D) $5,000 
E) None of the above

Question 19

Exhibit 23.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
-Refer to Exhibit 23.9. Assume that one year later the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.

Accepted Answer

A) $101.33 
B) $100.58 
C) $100.00 
D) $98.67 
E) $95.83 
A) $101.33 
B) $100.58 
C) $100.00 
D) $98.67 
E) $95.83

Question 20

Exhibit 23.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
-Refer to Exhibit 23.7. Indicate the market value of the swap to the WallMal Company.

Accepted Answer

A) $3,525,120 
B) -$3,500,000 
C) $1,332,150 
D) -$1,332,150 
E) $1,026,600 
A) $3,525,120 
B) -$3,500,000 
C) $1,332,150 
D) -$1,332,150 
E) $1,026,600

If interest rates fall, an interest rate cap would expire unexercised.

The conversion price parity for a convertible bond is defined as:

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

Convertibles provide the upside potential of common stock and the downside protection of a bond.

A warrant is an option to buy a stated number of shares of common stock at a specified price at any time during the life of the warrant.

The intrinsic value of a warrant is calculated as:

The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price)* Number of shares specified by the warrant.

The following are all advantages of having an equity swap market except

A plain vanilla swap agreement is used in similar situations as a forward rate agreement.

Which of the following is not a characteristic of warrants?

In convertible bonds, the value of the common stock price upon immediate conversion is the

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

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Exam 23: Swap Contracts, Convertible Securities, and Other Embedded Derivatives

If interest rates fall, an interest rate cap would expire unexercised.

The conversion price parity for a convertible bond is defined as:

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

Convertibles provide the upside potential of common stock and the downside protection of a bond.

A warrant is an option to buy a stated number of shares of common stock at a specified price at any time during the life of the warrant.

The intrinsic value of a warrant is calculated as:

The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price)* Number of shares specified by the warrant.

The following are all advantages of having an equity swap market except

A plain vanilla swap agreement is used in similar situations as a forward rate agreement.

Which of the following is not a characteristic of warrants?

In convertible bonds, the value of the common stock price upon immediate conversion is the

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters