Question 1

____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.

Accepted Answer

A) Structured notes 
B) Variable rate notes 
C) Systematic notes 
D) Embedded notes 
E) PC bonds 
A) Structured notes 
B) Variable rate notes 
C) Systematic notes 
D) Embedded notes 
E) PC bonds

Question 2

Exhibit 23.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 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 Darden'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 4.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from McIntire Industries at its bid rate of 4%. (Assume a notional principal of $25,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 23.2. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and McIntire.

Accepted Answer

A) The dealer is obligated to pay McIntire $62,500. 
B) The dealer is obligated to pay McIntire $57,500. 
C) McIntire is obligated to pay the dealer $62,500. 
D) McIntire is obligated to pay the dealer $57,500. 
E) None of the above 
A) The dealer is obligated to pay McIntire $62,500. 
B) The dealer is obligated to pay McIntire $57,500. 
C) McIntire is obligated to pay the dealer $62,500. 
D) McIntire is obligated to pay the dealer $57,500. 
E) None of the above

Question 3

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

Question 4

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. Assuming that one year after the swap was initiated the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of the 8% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.

Accepted Answer

A) $102.66 
B) $100.00 
C) $95.56 
D) $89.63 
E) $70.77 
A) $102.66 
B) $100.00 
C) $95.56 
D) $89.63 
E) $70.77

Question 5

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:
-
Settlement is made monthly.
-
The notional principal is for 500,000 barrels per month.
-
The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX).
-
The swap dealer pays BGI $57.00 per barrel.
-
BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
-
PU pays the swap dealer $57.50 per barrel.
-
The swap dealer pays PU dealer the average NYMEX Oil futures price per barrel.
-Refer to Exhibit 23.4. Barring default by PU or BGI, how much compensation does the swap dealer receive each month?

Accepted Answer

A) $150,000 
B) $210,000 
C) $175,000 
D) $250,000 
E) None of the above 
A) $150,000 
B) $210,000 
C) $175,000 
D) $250,000 
E) None of the above

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

By attaching a convertible feature to a bond issue a firm can often get a lower rate of interest on its debt.

Accepted Answer

A) True 
 B)False

Question 9

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. Suppose that 3-month LIBOR is 4.0% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and TexMex.

Accepted Answer

A) The dealer is obligated to pay TexMex $61,881. 
B) The dealer is obligated to pay TexMex $61,500. 
C) TexMex is obligated to pay the dealer $247,524. 
D) TexMex is obligated to pay the dealer $246,000. 
E) None of the above 
A) The dealer is obligated to pay TexMex $61,881. 
B) The dealer is obligated to pay TexMex $61,500. 
C) TexMex is obligated to pay the dealer $247,524. 
D) TexMex is obligated to pay the dealer $246,000. 
E) None of the above

Question 10

The forward rate agreement is the most complicated of the OTC interest rate contracts.

Accepted Answer

A) True 
 B)False

Question 11

Options embedded in real assets owned by firms are known as

Accepted Answer

A) Asset options. 
B) Binomial options. 
C) Company options. 
D) Warrant options. 
E) Real options. 
A) Asset options. 
B) Binomial options. 
C) Company options. 
D) Warrant options. 
E) Real options.

Question 12

The minimum price of a convertible bond is

Accepted Answer

A) Min (Bond Value, Conversion Value). 
B) Max (Bond Value, Conversion Value). 
C) Min (Stock Value, Conversion Value). 
D) Max (Stock Value, Conversion Value). 
E) None of the above. 
A) Min (Bond Value, Conversion Value). 
B) Max (Bond Value, Conversion Value). 
C) Min (Stock Value, Conversion Value). 
D) Max (Stock Value, Conversion Value). 
E) None of the above.

Question 13

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 advance, describe the transaction that occurs between the dealer and Chimichango.

Accepted Answer

A) The dealer is obligated to pay Chimichango $38,215.00 
B) The dealer is obligated to pay Chimichango $30,818.54. 
C) Chimichango is obligated to pay the dealer $31,818.54. 
D) Chimichango is obligated to pay the dealer $38,215.00 
E) None of the above. 
A) The dealer is obligated to pay Chimichango $38,215.00 
B) The dealer is obligated to pay Chimichango $30,818.54. 
C) Chimichango is obligated to pay the dealer $31,818.54. 
D) Chimichango is obligated to pay the dealer $38,215.00 
E) None of the above.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

An interest rate collar is a combination of a long position in either a cap or floor with a short position in the other.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 straight-bond value assuming that bonds of equivalent risk and maturity are yielding 13% per year compounded semiannually.

Accepted Answer

A) $942.65 
B) $902.65 
C) $889.82 
D) $796.83 
E) $757.37 
A) $942.65 
B) $902.65 
C) $889.82 
D) $796.83 
E) $757.37

Question 18

On the settlement date for a forward rate agreement (FRA) contract, the difference between the two interest rates is multiplied by the FRA's par value and prorated by the length of the holding period.

Accepted Answer

A) True 
 B)False

Question 19

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:
-
Settlement is made monthly.
-
The notional principal is for 500,000 barrels per month.
-
The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX).
-
The swap dealer pays BGI $57.00 per barrel.
-
BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
-
PU pays the swap dealer $57.50 per barrel.
-
The swap dealer pays PU dealer the average NYMEX Oil futures price per barrel.
-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 $58.45.

Accepted Answer

A) PU pays the swap dealer $725,000. 
B) The swap dealer pays PU $725,000. 
C) PU pays the swap dealer $475,000. 
D) The swap dealer pays PU $475,000. 
E) None of the above. 
A) PU pays the swap dealer $725,000. 
B) The swap dealer pays PU $725,000. 
C) PU pays the swap dealer $475,000. 
D) The swap dealer pays PU $475,000. 
E) None of the above.

Question 20

Exhibit 23.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 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 Darden'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 4.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from McIntire Industries at its bid rate of 4%. (Assume a notional principal of $25,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 23.2. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Darden.

Accepted Answer

A) The dealer is obligated to pay Darden $19,500 
B) The dealer is obligated to pay Darden $31,250 
C) Darden is obligated to pay the dealer $19,500 
D) Darden is obligated to pay the dealer $31,250 
E) None of the above 
A) The dealer is obligated to pay Darden $19,500 
B) The dealer is obligated to pay Darden $31,250 
C) Darden is obligated to pay the dealer $19,500 
D) Darden is obligated to pay the dealer $31,250 
E) None of the above

____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.

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

Which of the following is not a characteristic of warrants?

By attaching a convertible feature to a bond issue a firm can often get a lower rate of interest on its debt.

The forward rate agreement is the most complicated of the OTC interest rate contracts.

Options embedded in real assets owned by firms are known as

The minimum price of a convertible bond is

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

An interest rate collar is a combination of a long position in either a cap or floor with a short position in the other.

The intrinsic value of a warrant is calculated as:

On the settlement date for a forward rate agreement (FRA) contract, the difference between the two interest rates is multiplied by the FRA's par value and prorated by the length of the holding period.

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

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

____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.

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

Which of the following is not a characteristic of warrants?

By attaching a convertible feature to a bond issue a firm can often get a lower rate of interest on its debt.

The forward rate agreement is the most complicated of the OTC interest rate contracts.

Options embedded in real assets owned by firms are known as

The minimum price of a convertible bond is

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

An interest rate collar is a combination of a long position in either a cap or floor with a short position in the other.

The intrinsic value of a warrant is calculated as:

On the settlement date for a forward rate agreement (FRA) contract, the difference between the two interest rates is multiplied by the FRA's par value and prorated by the length of the holding period.

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