Question 1

____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.

Accepted Answer

A)  Structured notes 
B)  Variable rate notes 
C)  Systematic notes 
D)  Embedded notes 
E)  PC bonds 
A)  Structured notes 
B)  Variable rate notes 
C)  Systematic notes 
D)  Embedded notes 
E)  PC bonds

Question 2

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 advance, describe the transaction that occurs between the dealer and McIntire.

Accepted Answer

A)  The dealer is obligated to pay McIntire $61,728.40. 
B)  The dealer is obligated to pay McIntire $56,389.16. 
C)  McIntire is obligated to pay the dealer $56,389.16. 
D)  McIntire is obligated to pay the dealer $61,728.40. 
E)  None of the above 
A)  The dealer is obligated to pay McIntire $61,728.40. 
B)  The dealer is obligated to pay McIntire $56,389.16. 
C)  McIntire is obligated to pay the dealer $56,389.16. 
D)  McIntire is obligated to pay the dealer $61,728.40. 
E)  None of the above

Question 3

Exhibit 14-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 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 Chimichango'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 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 14-6. How much compensation does the dealer receive for transaction costs, credit risk and other costs associated with matching the FRA's?

Accepted Answer

A)  $30,000 
B)  $31,250 
C)  $7,500 
D)  $5,000 
E)  None of the above 
A)  $30,000 
B)  $31,250 
C)  $7,500 
D)  $5,000 
E)  None of the above

Question 4

In the Black-Scholes option pricing model, an increase in time to expiration (T) will cause

Accepted Answer

A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  An decrease in call value and an increase in put value 
D)  An decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value 
A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  An decrease in call value and an increase in put value 
D)  An decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value

Question 5

Exhibit 14-3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 14-3. Calculate the price of the call option today (C₀).

Accepted Answer

A)  $7.77 
B)  $14.35 
C)  $0 
D)  $4.21 
E)  $6.44 
A)  $7.77 
B)  $14.35 
C)  $0 
D)  $4.21 
E)  $6.44

Question 6

Exhibit 14-3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 14-3. Calculate the price of the call option after the stock price has already moved up in value once (Cd).

Accepted Answer

A)  $7.77 
B)  $14.35 
C)  $0 
D)  $4.21 
E)  $6.44 
A)  $7.77 
B)  $14.35 
C)  $0 
D)  $4.21 
E)  $6.44

Question 7

Exhibit 14-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Exclusive Industries has debentures outstanding (par value $1,000.00) convertible into exclusive's common stock at $30. The coupon rate is 11% payable semiannually and they mature in 10 years.
-Refer to Exhibit 14-8. Calculate the conversion value if the stock price is $24.00 par share.

Accepted Answer

A)  $600.00 
B)  $700.00 
C)  $800.00 
D)  $900.00 
E)  $1,000.00 
A)  $600.00 
B)  $700.00 
C)  $800.00 
D)  $900.00 
E)  $1,000.00

Question 8

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as

Accepted Answer

A)  Spider. 
B)  QQQ. 
C)  VIX. 
D)  CIN. 
E)  VOL. 
A)  Spider. 
B)  QQQ. 
C)  VIX. 
D)  CIN. 
E)  VOL.

Question 9

It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.

Accepted Answer

A) True 
 B)False

Question 10

A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.

Accepted Answer

A)  Swap 
B)  Cap 
C)  Floor 
D)  Collar 
E)  None of the above. 
A)  Swap 
B)  Cap 
C)  Floor 
D)  Collar 
E)  None of the above.

Question 11

Which of the following is not true about interest rate swaps?

Accepted Answer

A)  Payments are based on a notional principal. 
B)  Floating rate payers profit if interest rates fall. 
C)  Payments can be quarterly as well as semi-annually. 
D)  Parities exchange debt obligations. 
E)  Default risk is a possibility in the swaps market. 
A)  Payments are based on a notional principal. 
B)  Floating rate payers profit if interest rates fall. 
C)  Payments can be quarterly as well as semi-annually. 
D)  Parities exchange debt obligations. 
E)  Default risk is a possibility in the swaps market.

Question 12

Exhibit 14-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 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 Chimichango'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 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Chimichango.

Accepted Answer

A)  The dealer is obligated to pay Chimichango $38,750. 
B)  The dealer is obligated to pay Chimichango $31,250. 
C)  Chimichango is obligated to pay the dealer $38,750. 
D)  Chimichango is obligated to pay the dealer $31,250. 
E)  None of the above. 
A)  The dealer is obligated to pay Chimichango $38,750. 
B)  The dealer is obligated to pay Chimichango $31,250. 
C)  Chimichango is obligated to pay the dealer $38,750. 
D)  Chimichango is obligated to pay the dealer $31,250. 
E)  None of the above.

Question 13

Exhibit 14-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11% payable semiannually and they mature in 10 years.
-Refer to Exhibit 14-9. At present, what would be the minimum value of the bond?

Accepted Answer

A)  $600.00 
B)  $796.83 
C)  $889.82 
D)  $900.00 
E)  $1000.00 
A)  $600.00 
B)  $796.83 
C)  $889.82 
D)  $900.00 
E)  $1000.00

Question 14

An advantage of convertible bonds is

Accepted Answer

A)  Investors get the upside potential of a bond. 
B)  Investors get the upside potential of a stock. 
C)  Issuing firms can get a lower rate of interest on its debt. 
D)  Choices a and b. 
E)  Choices b and c. 
A)  Investors get the upside potential of a bond. 
B)  Investors get the upside potential of a stock. 
C)  Issuing firms can get a lower rate of interest on its debt. 
D)  Choices a and b. 
E)  Choices b and c.

Question 15

Exhibit 14-3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.
-Refer to Exhibit 14-3. Calculate the possible prices of the stock at the end of one year.

Accepted Answer

A)  $69, $51, $79.35 
B)  $51, $79.35, $58.65 
C)  $79.35, $58.65, $43.35 
D)  $58.65, $43.35, $14.35 
E)  None of the above 
A)  $69, $51, $79.35 
B)  $51, $79.35, $58.65 
C)  $79.35, $58.65, $43.35 
D)  $58.65, $43.35, $14.35 
E)  None of the above

Question 16

An investor considering investment in warrants as part of an overall program, should consider which of the following?

Accepted Answer

A)  Diversification 
B)  Cutting losses short, and letting profits run 
C)  A low intrinsic value 
D)  Viewing warrant selection as a portion of the total investment process 
E)  All of the above. 
A)  Diversification 
B)  Cutting losses short, and letting profits run 
C)  A low intrinsic value 
D)  Viewing warrant selection as a portion of the total investment process 
E)  All of the above.

Question 17

The Chicago Board Options Exchange has the largest share of stock option trading.

Accepted Answer

A) True 
 B)False

Question 18

Forward rate agreements usually require substantial collateral.

Accepted Answer

A) True 
 B)False

Question 19

The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.

Accepted Answer

A) True 
 B)False

Question 20

The binomial model is a continuous method for valuing options.

Accepted Answer

A) True 
 B)False

____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.

In the Black-Scholes option pricing model, an increase in time to expiration (T) will cause

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as

It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.

A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.

Which of the following is not true about interest rate swaps?

An advantage of convertible bonds is

An investor considering investment in warrants as part of an overall program, should consider which of the following?

The Chicago Board Options Exchange has the largest share of stock option trading.

Forward rate agreements usually require substantial collateral.

The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.

The binomial model is a continuous method for valuing options.

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

____ are debt instruments that have their principal or coupon payments tied to some other underlying variable.

In the Black-Scholes option pricing model, an increase in time to expiration (T) will cause

The calculation of a weighted average of the implied volatility estimates from options on the Standard & Poor's 500 index using a wide range of exercise prices is known as

It is always theoretically possible to use options as a perfect hedge against fluctuations in value of the underlying asset.

A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.

Which of the following is not true about interest rate swaps?

An advantage of convertible bonds is

An investor considering investment in warrants as part of an overall program, should consider which of the following?

The Chicago Board Options Exchange has the largest share of stock option trading.

Forward rate agreements usually require substantial collateral.

The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.

The binomial model is a continuous method for valuing options.

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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