Question 1

A bond manager who wishes to hold the bond with the greatest potential volatility would wise to hold:

Accepted Answer

A)  short-term, high-coupon bonds. 
B)  long-term, low-coupon bonds. 
C)  long-term, zero-coupon bonds. 
D)  short-term, zero-coupon bonds. 
E)  short-term, low-coupon bonds. 
A)  short-term, high-coupon bonds. 
B)  long-term, low-coupon bonds. 
C)  long-term, zero-coupon bonds. 
D)  short-term, zero-coupon bonds. 
E)  short-term, low-coupon bonds.

Question 2

If the producer of a product has entered into a fixed price sale agreement for that output, the producer faces:

Accepted Answer

A)  a nice steady profit because the output price is fixed. 
B)  an uncertain profit if the input prices are volatile. This risk can be reduced by a short hedge. 
C)  an uncertain profit if the input prices are volatile. This risk can be reduced by a long hedge. 
D)  a modest profit if the input prices are stable. This risk can be reduced by a long hedge. 
E)  a modest profit if the input prices are stable. This risk can be reduced by a short hedge. 
A)  a nice steady profit because the output price is fixed. 
B)  an uncertain profit if the input prices are volatile. This risk can be reduced by a short hedge. 
C)  an uncertain profit if the input prices are volatile. This risk can be reduced by a long hedge. 
D)  a modest profit if the input prices are stable. This risk can be reduced by a long hedge. 
E)  a modest profit if the input prices are stable. This risk can be reduced by a short hedge.

Question 3

If a firm purchases a cap at 10% this will:

Accepted Answer

A)  limit the amount of borrowing to 10% of assets. 
B)  pay the firm 10% on their purchase. 
C)  pay the holder the LIBOR interest above 10%. 
D)  pay the holder the LIBOR interest below the 10%. 
A)  limit the amount of borrowing to 10% of assets. 
B)  pay the firm 10% on their purchase. 
C)  pay the holder the LIBOR interest above 10%. 
D)  pay the holder the LIBOR interest below the 10%.

Question 4

If a financial institution has equated the dollar effects of interest rate risk on the assets with the dollar effects on the liabilities, it has engaged in:

Accepted Answer

A)  a long hedge. 
B)  a short hedge. 
C)  a protected swap. 
D)  immunizing interest rate risk. 
A)  a long hedge. 
B)  a short hedge. 
C)  a protected swap. 
D)  immunizing interest rate risk.

Question 5

The main difference between a forward contract and a cash transaction is:

Accepted Answer

A)  only the cash transaction creates an obligation to perform. 
B)  a forward is performed at a later date while the cash transaction is performed immediately. 
C)  only one involves a deliverable instrument. 
D)  neither allows for hedging. 
A)  only the cash transaction creates an obligation to perform. 
B)  a forward is performed at a later date while the cash transaction is performed immediately. 
C)  only one involves a deliverable instrument. 
D)  neither allows for hedging.

Question 6

An inverse floater and a super-inverse floater are more valuable to a purchaser if:

Accepted Answer

A)  interest rates stay the same. 
B)  interest rates fall. 
C)  interest rates rise. 
D)  if held for a long time. 
A)  interest rates stay the same. 
B)  interest rates fall. 
C)  interest rates rise. 
D)  if held for a long time.

Question 7

Suppose you agree to purchase one ounce of gold for $984 any time over the next month. The current price of gold is $970. The spot price of gold then falls to $960 the next day. If the agreement is represented by a futures contract marking to market on a daily basis as the price changes, what is your cash flow at the end of the next business day?

Accepted Answer

A)  $10 
B)  $5 
C)  $0 
D)  -$5 
E)  -$10 
A)  $10 
B)  $5 
C)  $0 
D)  -$5 
E)  -$10

Question 8

To protect against interest rate risk, the mortgage banker should:

Accepted Answer

A)  buy futures, as this position will hedge loses if rates rise. 
B)  sell futures, as this position will hedge losses if rates rise. 
C)  sell futures, as this position will add to his gains if rates rise. 
D)  buy futures, as this position will add to his gains if rates rise. 
A)  buy futures, as this position will hedge loses if rates rise. 
B)  sell futures, as this position will hedge losses if rates rise. 
C)  sell futures, as this position will add to his gains if rates rise. 
D)  buy futures, as this position will add to his gains if rates rise.

Question 9

On March 1, you contract to take delivery of 1 ounce of gold for $495. The agreement is good for any day up to April 1. Throughout March, the price of gold hit a low of $425 and hit a high of $535. The price settled on March 31 at $505, and on April 1st you settle your futures agreement at that price. Your net cash flow is:

Accepted Answer

A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $10. 
E)  $20. 
A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $10. 
E)  $20.

Question 10

What new asset duration will immunize the statement of financial position if the duration of the liabilities are 1.111?

Accepted Answer

Given DL = 1.111, th

A bond manager who wishes to hold the bond with the greatest potential volatility would wise to hold:

If the producer of a product has entered into a fixed price sale agreement for that output, the producer faces:

If a firm purchases a cap at 10% this will:

If a financial institution has equated the dollar effects of interest rate risk on the assets with the dollar effects on the liabilities, it has engaged in:

The main difference between a forward contract and a cash transaction is:

An inverse floater and a super-inverse floater are more valuable to a purchaser if:

To protect against interest rate risk, the mortgage banker should:

What new asset duration will immunize the statement of financial position if the duration of the liabilities are 1.111?

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Exam 26: Derivatives and Hedging Risk

A bond manager who wishes to hold the bond with the greatest potential volatility would wise to hold:

If the producer of a product has entered into a fixed price sale agreement for that output, the producer faces:

If a firm purchases a cap at 10% this will:

If a financial institution has equated the dollar effects of interest rate risk on the assets with the dollar effects on the liabilities, it has engaged in:

The main difference between a forward contract and a cash transaction is:

An inverse floater and a super-inverse floater are more valuable to a purchaser if:

To protect against interest rate risk, the mortgage banker should:

What new asset duration will immunize the statement of financial position if the duration of the liabilities are 1.111?

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters