Question 1

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%. 
E) None of the above. 
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%. 
E) None of the above.

Question 2

A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration, then to immunize, the firm needs to:

Accepted Answer

A) decrease the duration of its assets. 
B) increase the duration of its assets. 
C) decrease the duration of its liabilities. 
D) do nothing, i.e., keep the duration of its liabilities equal to the duration of its assets. 
A) decrease the duration of its assets. 
B) increase the duration of its assets. 
C) decrease the duration of its liabilities. 
D) do nothing, i.e., keep the duration of its liabilities equal to the duration of its assets.

Question 3

In percentage terms, higher coupon bonds experience a _______ price change compared with lower coupon bonds of the same maturity given a change in yield to maturity.

Accepted Answer

A) greater 
B) smaller 
C) similar 
D) smaller or greater 
E) None of the above. 
A) greater 
B) smaller 
C) similar 
D) smaller or greater 
E) None of the above.

Question 4

On March 1, you contract to take delivery of 1 ounce of gold for $415.The agreement is good for any day up to April 1.Throughout March, the price of gold hit a low of $385 and hit a high of $435.The price settled on March 31 at $420, 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) $5. 
E) $20. 
A) $-30. 
B) $-20. 
C) $-15. 
D) $5. 
E) $20.

Question 5

A farmer with wheat in the fields and who uses the futures market to protect a profit is an example of:

Accepted Answer

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

Question 6

A savings and loan has extremely long-term assets that are currently matched against extremely short-term liabilities.For this S&L:

Accepted Answer

A) falling interest rates will decrease the value of its equity. 
B) falling interest rates will increase the value of its equity. 
C) rising interest rates will increase the value of its equity. 
D) rising interest rates will decrease the value of its equity. 
E) Both B and D. 
A) falling interest rates will decrease the value of its equity. 
B) falling interest rates will increase the value of its equity. 
C) rising interest rates will increase the value of its equity. 
D) rising interest rates will decrease the value of its equity. 
E) Both B and D.

Question 7

Which of the following is true about the user of derivatives?

Accepted Answer

A) Derivatives usually appear explicitly in the financial statements. 
B) Academic surveys account for much of our knowledge of corporate derivatives use. 
C) Smaller firms are more likely to use derivatives than large firms. 
D) The most frequently used derivatives are commodity and equity futures. 
E) None of the above are true. 
A) Derivatives usually appear explicitly in the financial statements. 
B) Academic surveys account for much of our knowledge of corporate derivatives use. 
C) Smaller firms are more likely to use derivatives than large firms. 
D) The most frequently used derivatives are commodity and equity futures. 
E) None of the above are true.

Question 8

A bank has a $50 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?

Accepted Answer

A) 5 
B) 50 
C) 500 
D) 5,000 
E) 50,000 
A) 5 
B) 50 
C) 500 
D) 5,000 
E) 50,000

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

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 11

A derivative is a financial instrument whose value is determined by:

Accepted Answer

A) a regulatory body such as the FTC. 
B) a primitive or underlying asset. 
C) hedging a risk. 
D) hedging a speculation. 
E) None of the above. 
A) a regulatory body such as the FTC. 
B) a primitive or underlying asset. 
C) hedging a risk. 
D) hedging a speculation. 
E) None of the above.

Question 12

Credit default swaps:

Accepted Answer

A) will pay the holder the LIBOR interest rate. 
B) pay the borrower the LIBOR interest rate. 
C) are like insurance against a loss of value if the firm defaults on a bond. 
D) limit the amount of borrowing of all parties in the credit default swap. 
E) None of the above. 
A) will pay the holder the LIBOR interest rate. 
B) pay the borrower the LIBOR interest rate. 
C) are like insurance against a loss of value if the firm defaults on a bond. 
D) limit the amount of borrowing of all parties in the credit default swap. 
E) None of the above.

Question 13

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.You then decide to reverse your position in the futures market on the fifth day at close.What is the net amount you receive at the end of 5 days?

Accepted Answer

A) $0.00 
B) $2.60 
C) $2.70 
D) $2.80 
E) Must know the number of contracts 
A) $0.00 
B) $2.60 
C) $2.70 
D) $2.80 
E) Must know the number of contracts

Question 14

The duration of a 15 year zero coupon bond priced at $182.70 is:

Accepted Answer

A) 2.74 years. 
B) 15 years. 
C) 17.74 years. 
D) cannot determine without the interest rate. 
E) None of the above. 
A) 2.74 years. 
B) 15 years. 
C) 17.74 years. 
D) cannot determine without the interest rate. 
E) None of the above.

Question 15

A bank has a $80 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?

Accepted Answer

A) 5 
B) 80 
C) 800 
D) 8,000 
E) 80,000 
A) 5 
B) 80 
C) 800 
D) 8,000 
E) 80,000

Question 16

The duration of a 2 year annual 10% bond that is selling for par is:

Accepted Answer

A) 1.00 years. 
B) 1.91 years. 
C) 2.00 years. 
D) 2.09 years. 
E) None of the above. 
A) 1.00 years. 
B) 1.91 years. 
C) 2.00 years. 
D) 2.09 years. 
E) None of the above.

Question 17

$\begin{array} { l l l } 
\text { Assets } & \text { Duration } & \text { Market Value } \
\text { Overnight Money } & 0.0 & \text { \$3 Million } \
\text { 1-year T-Bonds } & 0.6 & \$ 8 \text { Million } \
\text { Loans } & 2.20 & \$ 20 \text { Million } \
\text { Mortgages } & 7.50 & \$ 8 \text { Million } \
\text { Liabilities } & \text { Duration } & \text { Market Value } \
\text { Checking Accounts } & 0.0 & \$ 20 \text { Million } \
\text { Short-term CD's } & 0.4 & \$ 4 \text { Million } \
\text { Long-term CD's } & 3.20 & \$ 12 \text { Million } \
\text { Equity } & &\text { \$3 Million } \

\end{array}$
-Calculate the duration of Tiger State Bank's assets and liabilities.

Accepted Answer

DA = (3/39)(0) + (8/39)(.6) +

Question 18

A Treasury note with a maturity of 2 years pays interest semi-annually on a 9 percent annual coupon rate.The $1,000 face value is returned at maturity.If the effective annual yield for all maturities is 7 percent annually, what is the current price of the Treasury note?

Accepted Answer

A) $960.68 
B) $986.69 
C) $1,010.35 
D) $1,034.40 
E) $1,038.99 
A) $960.68 
B) $986.69 
C) $1,010.35 
D) $1,034.40 
E) $1,038.99

Question 19

You bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading with the following close prices each day: $2.52, $2.57, $2.62, $2.68, and $2.70.What would the mark to market sequence be?

Accepted Answer

A) -.08, .05, .05, .06, .02 
B) .08, -.05, -.05, -.06, -.02 
C) .08, .03, -.02, -.06, -.10 
D) -.08, -.03, .02, .06, .10 
E) .10, .06, .02, -.03, -.08 
A) -.08, .05, .05, .06, .02 
B) .08, -.05, -.05, -.06, -.02 
C) .08, .03, -.02, -.06, -.10 
D) -.08, -.03, .02, .06, .10 
E) .10, .06, .02, -.03, -.08

Question 20

A financial institution can hedge its interest rate risk by:

Accepted Answer

A) matching the duration of its assets to the duration of its liabilities. 
B) setting the duration of its assets equal to half that of the duration of its liabilities. 
C) matching the duration of its assets, weighted by the market value of its assets with the duration of its liabilities, weighted by the market value of its liabilities. 
D) setting the duration of its assets, weighted by the market value of its assets to one half that of the duration of the liabilities, weighted by the market value of the liabilities. 
A) matching the duration of its assets to the duration of its liabilities. 
B) setting the duration of its assets equal to half that of the duration of its liabilities. 
C) matching the duration of its assets, weighted by the market value of its assets with the duration of its liabilities, weighted by the market value of its liabilities. 
D) setting the duration of its assets, weighted by the market value of its assets to one half that of the duration of the liabilities, weighted by the market value of the liabilities.

Exam 25: Derivatives and Hedging Risk

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

A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration, then to immunize, the firm needs to:

In percentage terms, higher coupon bonds experience a _______ price change compared with lower coupon bonds of the same maturity given a change in yield to maturity.

A farmer with wheat in the fields and who uses the futures market to protect a profit is an example of:

A savings and loan has extremely long-term assets that are currently matched against extremely short-term liabilities.For this S&L:

Which of the following is true about the user of derivatives?

A bank has a $50 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?

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

A derivative is a financial instrument whose value is determined by:

Credit default swaps:

The duration of a 15 year zero coupon bond priced at $182.70 is:

A bank has a $80 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?

The duration of a 2 year annual 10% bond that is selling for par is:

A Treasury note with a maturity of 2 years pays interest semi-annually on a 9 percent annual coupon rate.The $1,000 face value is returned at maturity.If the effective annual yield for all maturities is 7 percent annually, what is the current price of the Treasury note?

You bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading with the following close prices each day: $2.52, $2.57, $2.62, $2.68, and $2.70.What would the mark to market sequence be?

A financial institution can hedge its interest rate risk by:

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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