Question 1

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

Accepted Answer

A) a long hedge. 
B) a short hedge. 
C) a protected swap. 
D) immunizing interest rate risk. 
E) None of the above. 
A) a long hedge. 
B) a short hedge. 
C) a protected swap. 
D) immunizing interest rate risk. 
E) None of the above.

Question 2

A potential disadvantage of forward contracts versus futures contracts is:

Accepted Answer

A) the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market. 
B) the incentive for a particular party to default. 
C) that the buyers and sellers don't know each other and never meet. 
D) All of the above. 
E) Both A and C. 
A) the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market. 
B) the incentive for a particular party to default. 
C) that the buyers and sellers don't know each other and never meet. 
D) All of the above. 
E) Both A and C.

Question 3

Duration of a pure discount bond:

Accepted Answer

A) is equal to its half-life. 
B) is less than a zero coupon bond. 
C) is equal to the liabilities hedged. 
D) is equal to its maturity. 
E) None of the above. 
A) is equal to its half-life. 
B) is less than a zero coupon bond. 
C) is equal to the liabilities hedged. 
D) is equal to its maturity. 
E) None of the above.

Question 4

A pure discount bond pays:

Accepted Answer

A) no coupons, therefore its duration is equal to its maturity. 
B) discounted coupons, therefore its duration is greater than its maturity. 
C) level coupons, therefore its duration is equal to its maturity. 
D) declining coupons, therefore its duration is less than its maturity. 
E) None of the above. 
A) no coupons, therefore its duration is equal to its maturity. 
B) discounted coupons, therefore its duration is greater than its maturity. 
C) level coupons, therefore its duration is equal to its maturity. 
D) declining coupons, therefore its duration is less than its maturity. 
E) None of the above.

Question 5

The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?

Accepted Answer

There are several reasons:
The market se

Question 6

Duration of a coupon paying bond is:

Accepted Answer

A) equal to its number of payments. 
B) less than a zero coupon bond. 
C) equal to the zero coupon bond. 
D) equal to its maturity. 
E) None of the above. 
A) equal to its number of payments. 
B) less than a zero coupon bond. 
C) equal to the zero coupon bond. 
D) equal to its maturity. 
E) None of the above.

Question 7

If rates in the market fall between now and one month from now, the mortgage banker:

Accepted Answer

A) loses as the mortgages are sold at a discount. 
B) gains as the mortgages are sold at a discount. 
C) loses as the mortgages are sold at a premium. 
D) gains as the mortgages are sold at a premium. 
E) neither gains nor loses. 
A) loses as the mortgages are sold at a discount. 
B) gains as the mortgages are sold at a discount. 
C) loses as the mortgages are sold at a premium. 
D) gains as the mortgages are sold at a premium. 
E) neither gains nor loses.

Question 8

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

Accepted Answer

A) buy futures, as this position will hedge losses 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. 
E) None of the above. 
A) buy futures, as this position will hedge losses 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. 
E) None of the above.

Question 9

A chocolate company which uses the futures market to lock in the price of cocoa to protect a profit is an example of:

Accepted Answer

A) a long hedge. 
B) a short hedge. 
C) purchasing futures to guard against a potential loss. 
D) Both A and C. 
E) Both B and C. 
A) a long hedge. 
B) a short hedge. 
C) purchasing futures to guard against a potential loss. 
D) Both A and C. 
E) Both B and C.

Question 10

A forward contract is described by:

Accepted Answer

A) agreeing today to buy a product at a later date at a price to be set in the future. 
B) agreeing today to buy a product today at its current price. 
C) agreeing today to buy a product at a later date at a price set today. 
D) agreeing today to buy a product if and only if its price rises above the exercise price today at its current price. 
E) None of the above. 
A) agreeing today to buy a product at a later date at a price to be set in the future. 
B) agreeing today to buy a product today at its current price. 
C) agreeing today to buy a product at a later date at a price set today. 
D) agreeing today to buy a product if and only if its price rises above the exercise price today at its current price. 
E) None of the above.

Question 11

There are always ___ counterparties in a credit default swap:

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 3 
E) more than three 
A) 0 
B) 1 
C) 2 
D) 3 
E) more than three

Question 12

Suppose you agree to purchase one ounce of gold for $382 any time over the next month.The current price of gold is $380.The spot price of gold then falls to $377 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) $0 
B) $3 
C) $5 
D) $-3 
E) $-5 
A) $0 
B) $3 
C) $5 
D) $-3 
E) $-5

Question 13

A swap is an arrangement for two counterparties to:

Accepted Answer

A) exchange cash flows over time. 
B) permit fluctuation in interest rates. 
C) help exchange markets clear. 
D) All of the above. 
E) None of the above. 
A) exchange cash flows over time. 
B) permit fluctuation in interest rates. 
C) help exchange markets clear. 
D) All of the above. 
E) None of the above.

Question 14

In the practical use of credit default swaps there:

Accepted Answer

A) is not an organized exchange or template for the agreement. 
B) is an organized exchange or template for the agreement. 
C) are laws making them illegal in the United States. 
D) are limits to the amount of borrowing of both parties. 
E) None of the above. 
A) is not an organized exchange or template for the agreement. 
B) is an organized exchange or template for the agreement. 
C) are laws making them illegal in the United States. 
D) are limits to the amount of borrowing of both parties. 
E) None of the above.

Question 15

Calculate the duration of a 4-year $1,000 face value bond, which pays 8% coupons annually throughout maturity and has a yield to maturity of 9%.

Accepted Answer

A) 3.29 years 
B) 3.57 years 
C) 3.69 years 
D) 3.89 years 
E) 4.00 years 
A) 3.29 years 
B) 3.57 years 
C) 3.69 years 
D) 3.89 years 
E) 4.00 years

Question 16

The buyer of a forward contract:

Accepted Answer

A) will be taking delivery of the good(s) today at today's price. 
B) will be making delivery of the good(s) at a later date at that date's price. 
C) will be making delivery of the good(s) today at today's price. 
D) will be taking delivery of the good(s) at a later date at pre-specified price. 
E) Both A or D. 
A) will be taking delivery of the good(s) today at today's price. 
B) will be making delivery of the good(s) at a later date at that date's price. 
C) will be making delivery of the good(s) today at today's price. 
D) will be taking delivery of the good(s) at a later date at pre-specified price. 
E) Both A or D.

Question 17

Firm A is paying $750,000 in interest payments a year while Firm B is paying LIBOR plus 75 basis points on $10,000,000 loans.The current LIBOR rate is 6.5%.Firm A and B have agreed to swap interest payments.What is the net payment this year?

Accepted Answer

A) Firm A pays $750,000 to Firm B 
B) Firm B pays $725,000 to Firm A 
C) Firm B pays $25,000 to Firm A 
D) Firm A pays $25,000 to Firm B 
E) None of the above. 
A) Firm A pays $750,000 to Firm B 
B) Firm B pays $725,000 to Firm A 
C) Firm B pays $25,000 to Firm A 
D) Firm A pays $25,000 to Firm B 
E) None of the above.

Question 18

A bond manager who wishes to hold the bond with the greatest potential volatility would be 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 19

When interest rates shift, the price of zero coupon bonds:

Accepted Answer

A) are more volatile as compared with short-term bonds of the same maturity. 
B) are less volatile as compared with short-term bonds of the same maturity. 
C) are more volatile as compared with long-term bonds of the same maturity. 
D) are less volatile as compared with long-term bonds of the same maturity. 
E) Both A and C. 
A) are more volatile as compared with short-term bonds of the same maturity. 
B) are less volatile as compared with short-term bonds of the same maturity. 
C) are more volatile as compared with long-term bonds of the same maturity. 
D) are less volatile as compared with long-term bonds of the same maturity. 
E) Both A and C.

Question 20

You have taken a short position in a futures contract on corn at $2.60 per bushel.Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70.Before you can reverse your position in the futures market on the fifth day you are notified to complete delivery.What will you receive on delivery and what is the net amount you receive in total?

Accepted Answer

A) $2.60; $-0.10 
B) $2.60; $0.10 
C) $2.60; $2.70 
D) $2.70; $-0.10 
E) $2.70; $2.60 
A) $2.60; $-0.10 
B) $2.60; $0.10 
C) $2.60; $2.70 
D) $2.70; $-0.10 
E) $2.70; $2.60

Exam 25: Derivatives and Hedging Risk

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

A potential disadvantage of forward contracts versus futures contracts is:

Duration of a pure discount bond:

A pure discount bond pays:

The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?

Duration of a coupon paying bond is:

If rates in the market fall between now and one month from now, the mortgage banker:

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

A chocolate company which uses the futures market to lock in the price of cocoa to protect a profit is an example of:

A forward contract is described by:

There are always ___ counterparties in a credit default swap:

A swap is an arrangement for two counterparties to:

In the practical use of credit default swaps there:

Calculate the duration of a 4-year $1,000 face value bond, which pays 8% coupons annually throughout maturity and has a yield to maturity of 9%.

The buyer of a forward contract:

Firm A is paying $750,000 in interest payments a year while Firm B is paying LIBOR plus 75 basis points on $10,000,000 loans.The current LIBOR rate is 6.5%.Firm A and B have agreed to swap interest payments.What is the net payment this year?

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

When interest rates shift, the price of zero coupon bonds:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

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

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

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 Securities to the Public

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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