Question 1

The most important input the investor must provide in determining option values is the strike price.

Accepted Answer

A) True 
 B)False  False

Question 2

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. A

Question 3

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

Accepted Answer

A)  Future security price. 
B)  Exercise price. 
C)  Time to expiration. 
D)  Risk-free rate. 
E)  Security price volatility. 
A)  Future security price. 
B)  Exercise price. 
C)  Time to expiration. 
D)  Risk-free rate. 
E)  Security price volatility. A

Question 4

Which of the following is an example of a commodity-linked fixed income security?

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 5

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

Accepted Answer

A) True 
 B)False

Question 6

The longer the time to expiration, the greater the value of a call option.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 14-10
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(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 14-10. 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 8

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 9

Exhibit 14-2
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 14-2. Estimate n, the number of call options that must be written.

Accepted Answer

A)  -1.4286 
B)  -2.9286 
C)  -2.8571 
D)  -2.5714 
E)  -1.1111 
A)  -1.4286 
B)  -2.9286 
C)  -2.8571 
D)  -2.5714 
E)  -1.1111

Question 10

There is an inverse relationship between the market interest rate and the value of a call option.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 14-10
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(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 14-10. Indicate the market value of the swap to the WallMal Company.

Accepted Answer

A)  $3,525,120 
B)  -$3,500,000 
C)  $1,332,150 
D)  -$1,332,150 
E)  $1,026,600 
A)  $3,525,120 
B)  -$3,500,000 
C)  $1,332,150 
D)  -$1,332,150 
E)  $1,026,600

Question 12

By attaching a convertible feature to a bond issue a firm can often get a lower rate of interest on its debt.

Accepted Answer

A) True 
 B)False

Question 13

Options on futures expire at the same time the futures contract expires.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 14-2
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 14-2. Calculate the possible prices of the stock one year from today.

Accepted Answer

A)  $37.50 or $17.50. 
B)  $62.50 or $37.50. 
C)  $62.50 or $17.50. 
D)  $50 or $45. 
E)  None of the above. 
A)  $37.50 or $17.50. 
B)  $62.50 or $37.50. 
C)  $62.50 or $17.50. 
D)  $50 or $45. 
E)  None of the above.

Question 15

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

Accepted Answer

A) True 
 B)False

Question 16

The conversion price parity for a convertible bond is defined as:

Accepted Answer

A)  Market Price of Convertible Bond / Conversion Ration. 
B)  Market Price of Convertible Bond ´ Conversion Ration. 
C)  Market Price of Convertible Bond - Conversion Ration. 
D)  Market Price of Convertible Bond + Conversion Ration. 
E)  None of the above. 
A)  Market Price of Convertible Bond / Conversion Ration. 
B)  Market Price of Convertible Bond ´ Conversion Ration. 
C)  Market Price of Convertible Bond - Conversion Ration. 
D)  Market Price of Convertible Bond + Conversion Ration. 
E)  None of the above.

Question 17

In index options, the aggregate market takes the place of the individual stock issues being traded, as in stock options.

Accepted Answer

A) True 
 B)False

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 14-10
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(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 14-10. Assuming 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 20

Exhibit 14-5
USE THE FOLLOWING INFORMATION FOR THE NEXT 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 14-5. Assuming that 3-month LIBOR is 5.00% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and McIntire.

Accepted Answer

A)  The dealer is obligated to pay McIntire $62,500 
B)  The dealer is obligated to pay McIntire $57,500 
C)  McIntire is obligated to pay the dealer $62,500 
D)  McIntire is obligated to pay the dealer $57,500 
E)  None of the above 
A)  The dealer is obligated to pay McIntire $62,500 
B)  The dealer is obligated to pay McIntire $57,500 
C)  McIntire is obligated to pay the dealer $62,500 
D)  McIntire is obligated to pay the dealer $57,500 
E)  None of the above

The most important input the investor must provide in determining option values is the strike price.

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

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

Which of the following is an example of a commodity-linked fixed income security?

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

The longer the time to expiration, the greater the value of a call option.

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

There is an inverse relationship between the market interest rate and the value of a call option.

By attaching a convertible feature to a bond issue a firm can often get a lower rate of interest on its debt.

Options on futures expire at the same time the futures contract expires.

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

The conversion price parity for a convertible bond is defined as:

In index options, the aggregate market takes the place of the individual stock issues being traded, as in stock options.

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.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 14: Derivatives: Analysis and Valuation

The most important input the investor must provide in determining option values is the strike price.

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

Which of the following is not a variable required to determine an option's value in the Black-Scholes valuation model?

Which of the following is an example of a commodity-linked fixed income security?

The binomial option pricing model approximates the price of an option obtained using the Black-Scholes option pricing model as the number of subintervals increases.

The longer the time to expiration, the greater the value of a call option.

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

There is an inverse relationship between the market interest rate and the value of a call option.

By attaching a convertible feature to a bond issue a firm can often get a lower rate of interest on its debt.

Options on futures expire at the same time the futures contract expires.

The Options Clearing Corporation (OCC) acts as the guarantor of each Chicago Board Options Exchange (CBOE) traded contract.

The conversion price parity for a convertible bond is defined as:

In index options, the aggregate market takes the place of the individual stock issues being traded, as in stock options.

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.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters