Question 1

A set of bonds all have the same maturity.Which one has the least percentage price changes for given shifts in interest rates:

Accepted Answer

A)  zero coupon bonds. 
B)  high coupon bonds. 
C)  low coupon bonds. 
D)  pure discount bonds. 
A)  zero coupon bonds. 
B)  high coupon bonds. 
C)  low coupon bonds. 
D)  pure discount bonds. C

Question 2

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%. C

Question 3

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. 
A)  a regulatory body such as the FTC. 
B)  a primitive or underlying asset. 
C)  hedging a risk. 
D)  hedging a speculation. B

Question 4

A pure discount bond pays:

Accepted Answer

A)  no coupons, therefore its duration 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. 
A)  no coupons, therefore its duration 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.

Question 5

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. 
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.

Question 6

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 
A)  greater 
B)  smaller 
C)  similar 
D)  smaller or greater

Question 7

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 8

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)  -$30.00. 
B)  $20.00. 
C)  $5.00. 
D)  -$15.00. 
E)  -$20.00. 
A)  -$30.00. 
B)  $20.00. 
C)  $5.00. 
D)  -$15.00. 
E)  -$20.00.

Question 9

A futures contract on gold states that buyers and sellers agree to make or take delivery of an ounce of gold for $400 per ounce.The contract expires in 3 months.The current price of gold is $350 per ounce.If the price of gold rises and continues to rise by $1 every day over the 3 month period,then when the contract is settled,the buyer will _____ and the seller will ____.

Accepted Answer

A)  lose; gain 
B)  gain; lose 
C)  gain; break even 
D)  gain; gain 
E)  lose; lose 
A)  lose; gain 
B)  gain; lose 
C)  gain; break even 
D)  gain; gain 
E)  lose; lose

Question 10

Calculate the duration of Tiger State Bank's assets and liabilities.

Accepted Answer

DA = (20/39)(0)+ (8/39)(.6)+ (

Question 11

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 business on the next day?

Accepted Answer

A)  $0.00. 
B)  $3.00. 
C)  $5.00. 
D)  -$3.00. 
E)  -$5.00. 
A)  $0.00. 
B)  $3.00. 
C)  $5.00. 
D)  -$3.00. 
E)  -$5.00.

Question 12

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 13

Duration of a coupon paying bond with same maturity 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. 
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.

Question 14

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 15

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

The semi-annual spot

Question 16

LIBOR stands for:

Accepted Answer

A)  Luasanne Interest Basis Offered Rate 
B)  Libido Over Redline. 
C)  London Interbank Offered Rate. 
D)  London Interagency Overt Rate. 
A)  Luasanne Interest Basis Offered Rate 
B)  Libido Over Redline. 
C)  London Interbank Offered Rate. 
D)  London Interagency Overt Rate.

Question 17

Comparing long-term bonds with short-term bonds,long-term bonds are _____ volatile and therefore experience _____ price change compared with short-term bonds for the same interest rate shift.

Accepted Answer

A)  less; less 
B)  less; more 
C)  more; more 
D)  more; less 
E)  more; the same 
A)  less; less 
B)  less; more 
C)  more; more 
D)  more; less 
E)  more; the same

Question 18

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 19

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

Accepted Answer

A)  15 years. 
B)  2.74 years. 
C)  17.74 years. 
D)  Cannot determine without the interest rate. 
A)  15 years. 
B)  2.74 years. 
C)  17.74 years. 
D)  Cannot determine without the interest rate.

Question 20

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

Accepted Answer

Market to set (discover)prices for asset

Exam 26: Derivatives and Hedging Risk

A set of bonds all have the same maturity.Which one has the least percentage price changes for given shifts in interest rates:

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

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

A pure discount bond pays:

The buyer of a forward contract:

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.

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

Calculate the duration of Tiger State Bank's assets and liabilities.

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:

Duration of a coupon paying bond with same maturity is:

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

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?

LIBOR stands for:

Comparing long-term bonds with short-term bonds,long-term bonds are _____ volatile and therefore experience _____ price change compared with short-term bonds for the same interest rate shift.

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:

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

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

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

Comparing long-term bonds with short-term bonds,long-term bonds are _ volatile and therefore experience _ price change compared with short-term bonds for the same interest rate shift.