Question 1

An equity call option issued directly by the company whose stock serves as the underlying asset is known as a

Accepted Answer

A) Collar. 
B) Cap. 
C) Floor. 
D) Warrant. 
E) Swap. 
A) Collar. 
B) Cap. 
C) Floor. 
D) Warrant. 
E) Swap.

Question 2

While LIBOR is usually used with forward rate agreements it is rarely used with other interest rate agreements.

Accepted Answer

A) True 
 B)False

Question 3

Exhibit 23.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is $2,500,000, and the settlement is every 6 months. Assume a 360 day year.
-Refer to Exhibit 23.1. Find the payoff if LIBOR closes at 8.2%.

Accepted Answer

A) $0.00 
B) $25,000.00 
C) $50,000.00 
D) -$25,000.00 
E) -$50,000.00 
A) $0.00 
B) $25,000.00 
C) $50,000.00 
D) -$25,000.00 
E) -$50,000.00

Question 4

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

Accepted Answer

A) The dealer is obligated to pay McIntire $61,728.40. 
B) The dealer is obligated to pay McIntire $56,389.16. 
C) McIntire is obligated to pay the dealer $56,389.16. 
D) McIntire is obligated to pay the dealer $61,728.40. 
E) None of the above 
A) The dealer is obligated to pay McIntire $61,728.40. 
B) The dealer is obligated to pay McIntire $56,389.16. 
C) McIntire is obligated to pay the dealer $56,389.16. 
D) McIntire is obligated to pay the dealer $61,728.40. 
E) None of the above

Question 5

The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

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 BGI and the swap dealer if the monthly average oil futures settlement price is $58.45.

Accepted Answer

A) BGI pays the swap dealer $725,000. 
B) The swap dealer pays BGI $725,000. 
C) BGI pays the swap dealer $675,000. 
D) The swap dealer pays BGI $675,000. 
E) None of the above. 
A) BGI pays the swap dealer $725,000. 
B) The swap dealer pays BGI $725,000. 
C) BGI pays the swap dealer $675,000. 
D) The swap dealer pays BGI $675,000. 
E) None of the above.

Question 9

A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.

Accepted Answer

A) Swap 
B) Cap 
C) Floor 
D) Collar 
E) None of the above 
A) Swap 
B) Cap 
C) Floor 
D) Collar 
E) None of the above

Question 10

An example of a commodity-linked fixed income security is a

Accepted Answer

A) Cap and floor note. 
B) Cash and debit. 
C) Commodity debenture. 
D) Bull and bear note. 
E) Derivative commodity note. 
A) Cap and floor note. 
B) Cash and debit. 
C) Commodity debenture. 
D) Bull and bear note. 
E) Derivative commodity note.

Question 11

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 12

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. Assume that one year after the swap was initiated the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has risen to 9% 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) $76.45 
B) $101.24 
C) $100.0 
D) $97.42 
E) $70.77 
A) $76.45 
B) $101.24 
C) $100.0 
D) $97.42 
E) $70.77

Question 13

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. Assume that one year later the fixed rate on a new 3-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) $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 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 BGI and the swap dealer if the monthly average oil futures settlement price is $55.50.

Accepted Answer

A) BGI pays the swap dealer $750,000. 
B) The swap dealer pays BGI $800,000. 
C) BGI pays the swap dealer $800,000. 
D) The swap dealer pays BGI $750,000. 
E) None of the above. 
A) BGI pays the swap dealer $750,000. 
B) The swap dealer pays BGI $800,000. 
C) BGI pays the swap dealer $800,000. 
D) The swap dealer pays BGI $750,000. 
E) None of the above.

Question 17

A pay-fixed interest rate swap can be viewed as equivalent to

Accepted Answer

A) A long position in a par valued FRN and a long position in a par valued fixed rate note. 
B) A long position in a par valued FRN and a short position in a par valued fixed rate note. 
C) A short position in a par valued FRN and a long position in a par valued fixed rate note. 
D) A short position in a par valued FRN and a short position in a par valued fixed rate note. 
E) None of the above. 
A) A long position in a par valued FRN and a long position in a par valued fixed rate note. 
B) A long position in a par valued FRN and a short position in a par valued fixed rate note. 
C) A short position in a par valued FRN and a long position in a par valued fixed rate note. 
D) A short position in a par valued FRN and a short position in a par valued fixed rate note. 
E) None of the above.

Question 18

A major difference between a call option and a warrant is that call options are issued by the company so that any proceeds from the sale of stock go to the issuing firm.

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 $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 20

All of the following are normal characteristics of a convertible bond, except

Accepted Answer

A) Conversion at the option of the issuer. 
B) Conversion into a fixed number of shares of common stock. 
C) A conversion price initially above the market price of the common stock. 
D) An interest rate lower than that on straight debentures. 
E) Subordination. 
A) Conversion at the option of the issuer. 
B) Conversion into a fixed number of shares of common stock. 
C) A conversion price initially above the market price of the common stock. 
D) An interest rate lower than that on straight debentures. 
E) Subordination.

An equity call option issued directly by the company whose stock serves as the underlying asset is known as a

While LIBOR is usually used with forward rate agreements it is rarely used with other interest rate agreements.

The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.

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

A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.

An example of a commodity-linked fixed income security is a

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.

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

A pay-fixed interest rate swap can be viewed as equivalent to

A major difference between a call option and a warrant is that call options are issued by the company so that any proceeds from the sale of stock go to the issuing firm.

All of the following are normal characteristics of a convertible bond, except

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

An equity call option issued directly by the company whose stock serves as the underlying asset is known as a

While LIBOR is usually used with forward rate agreements it is rarely used with other interest rate agreements.

The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.

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

A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.

An example of a commodity-linked fixed income security is a

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.

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

A pay-fixed interest rate swap can be viewed as equivalent to

A major difference between a call option and a warrant is that call options are issued by the company so that any proceeds from the sale of stock go to the issuing firm.

All of the following are normal characteristics of a convertible bond, except

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