Question 1

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

Accepted Answer

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

Question 2

The conversion price parity for a convertible bond is defined as

Accepted Answer

A)  market price of convertible bond/conversion ratio. 
B)  market price of convertible bond x conversion ratio. 
C)  market price of convertible bond − conversion ratio. 
D)  market price of convertible bond + conversion ratio. 
E)  none of the above. 
A)  market price of convertible bond/conversion ratio. 
B)  market price of convertible bond x conversion ratio. 
C)  market price of convertible bond − conversion ratio. 
D)  market price of convertible bond + conversion ratio. 
E)  none of the above. A

Question 3

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. D

Question 4

Refer to the following information. 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 x 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.)
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 Darden.

Accepted Answer

A)  The dealer is obligated to pay Darden €19 500 
B)  The dealer is obligated to pay Darden €31 250 
C)  Darden is obligated to pay the dealer €19 500 
D)  Darden is obligated to pay the dealer €31 250 
E)  None of the above 
A)  The dealer is obligated to pay Darden €19 500 
B)  The dealer is obligated to pay Darden €31 250 
C)  Darden is obligated to pay the dealer €19 500 
D)  Darden is obligated to pay the dealer €31 250 
E)  None of the above

Question 5

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 firm can get a lower rate of interest on its debt. 
D)  a and b. 
E)  b and c. 
A)  investors get the upside potential of a bond. 
B)  investors get the upside potential of a stock. 
C)  issuing firm can get a lower rate of interest on its debt. 
D)  a and b. 
E)  b and c.

Question 6

Refer to the following information. A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is €2 500 000 and the settlement is every 6 months. Assume a 360 day year.
Find the payoff if LIBOR closes at 8.2%.

Accepted Answer

A)  €0.00 
B)  €25 000.00 
C)  €50 000.00 
D)  −€25 000.00 
E)  −€50 000.00 
A)  €0.00 
B)  €25 000.00 
C)  €50 000.00 
D)  −€25 000.00 
E)  −€50 000.00

Question 7

Refer to the previous question. 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 Darden.

Accepted Answer

A)  The dealer is obligated to pay Darden €30 864.20. 
B)  The dealer is obligated to pay Darden €19 359.61. 
C)  Darden is obligated to pay the dealer €19 359.61. 
D)  Darden is obligated to pay the dealer €30 864.20. 
E)  None of the above 
A)  The dealer is obligated to pay Darden €30 864.20. 
B)  The dealer is obligated to pay Darden €19 359.61. 
C)  Darden is obligated to pay the dealer €19 359.61. 
D)  Darden is obligated to pay the dealer €30 864.20. 
E)  None of the above

Question 8

The minimum price of a convertible bond is

Accepted Answer

A)  Min (Bond Value, Conversion Value). 
B)  Max (Bond Value, Conversion Value). 
C)  Min (Stock Value, Conversion Value). 
D)  Max (Stock Value, Conversion Value). 
E)  None of the above. 
A)  Min (Bond Value, Conversion Value). 
B)  Max (Bond Value, Conversion Value). 
C)  Min (Stock Value, Conversion Value). 
D)  Max (Stock Value, Conversion Value). 
E)  None of the above.

Question 9

____ have coupons denominated in a currency other than that of their principal.

Accepted Answer

A)  Eurodollar bonds 
B)  Euromarket bonds 
C)  Dual currency bonds 
D)  Bi-currency bonds 
E)  Forward currency bonds 
A)  Eurodollar bonds 
B)  Euromarket bonds 
C)  Dual currency bonds 
D)  Bi-currency bonds 
E)  Forward currency bonds

Question 10

The writer of a ____ agreement makes settlement payments when LIBOR is greater than the striking rate of the agreement.

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

The intrinsic value of a warrant is calculated as:

Accepted Answer

A)  (Market price of common stock + Warrant exercise price) x Number of shares specified by warrant. 
B)  (Market price of common stock − Warrant exercise price) x Number of shares specified by warrant. 
C)  (Market price of common stock + Warrant exercise price)/Number of shares specified by warrant. 
D)  (Market price of common stock − Warrant exercise price)/Number of shares specified by warrant. 
E)  None of the above. 
A)  (Market price of common stock + Warrant exercise price) x Number of shares specified by warrant. 
B)  (Market price of common stock − Warrant exercise price) x Number of shares specified by warrant. 
C)  (Market price of common stock + Warrant exercise price)/Number of shares specified by warrant. 
D)  (Market price of common stock − Warrant exercise price)/Number of shares specified by warrant. 
E)  None of the above.

Question 12

Consider a pension fund manager that wishes to convert €10 million from notes paying LIBOR to stocks, using an equity swap. The equity swap should be structured so that

Accepted Answer

A)  the pension fund receives LIBOR and pays an equity return based on notional principal of €5 million. 
B)  the pension fund pays LIBOR and receives an equity return based on notional principal of €5 million. 
C)  the pension fund receives LIBOR and pays an equity return based on notional principal of €10 million. 
D)  the pension fund pays LIBOR and receives an equity return based on notional principal of €10 million. 
E)  none of the above. 
A)  the pension fund receives LIBOR and pays an equity return based on notional principal of €5 million. 
B)  the pension fund pays LIBOR and receives an equity return based on notional principal of €5 million. 
C)  the pension fund receives LIBOR and pays an equity return based on notional principal of €10 million. 
D)  the pension fund pays LIBOR and receives an equity return based on notional principal of €10 million. 
E)  none of the above.

Question 13

Which of the following is not a characteristic of warrants?

Accepted Answer

A)  They are sweeteners added to other security issues. 
B)  After the initial sale, warrants are detachable. 
C)  They pay no dividends. 
D)  They provide no voting rights. 
E)  No dilution protection is offered in the event of stock dividends or stock splits. 
A)  They are sweeteners added to other security issues. 
B)  After the initial sale, warrants are detachable. 
C)  They pay no dividends. 
D)  They provide no voting rights. 
E)  No dilution protection is offered in the event of stock dividends or stock splits.

Question 14

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.

Question 15

Suppose the premium on a three year, four per cent floor is equal to the premium on a three year, eight per cent cap. This combination is referred to as

Accepted Answer

A)  zero-cost warrant 
B)  zero-premium strap 
C)  zero-cost collar 
D)  zero-premium swap 
E)  zero-cost FRA 
A)  zero-cost warrant 
B)  zero-premium strap 
C)  zero-cost collar 
D)  zero-premium swap 
E)  zero-cost FRA

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

The conversion price parity for a convertible bond is defined as

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

An advantage of convertible bonds is

Refer to the previous question. 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 Darden.

The minimum price of a convertible bond is

____ have coupons denominated in a currency other than that of their principal.

The writer of a ____ agreement makes settlement payments when LIBOR is greater than the striking rate of the agreement.

The intrinsic value of a warrant is calculated as:

Consider a pension fund manager that wishes to convert €10 million from notes paying LIBOR to stocks, using an equity swap. The equity swap should be structured so that

Which of the following is not a characteristic of warrants?

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

Suppose the premium on a three year, four per cent floor is equal to the premium on a three year, eight per cent cap. This combination is referred to as

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Exam 23: Swap Contracts, Convertible Securities and Other Embedded Derivatives

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

The conversion price parity for a convertible bond is defined as

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

An advantage of convertible bonds is

Refer to the previous question. 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 Darden.

The minimum price of a convertible bond is

____ have coupons denominated in a currency other than that of their principal.

The writer of a ____ agreement makes settlement payments when LIBOR is greater than the striking rate of the agreement.

The intrinsic value of a warrant is calculated as:

Consider a pension fund manager that wishes to convert €10 million from notes paying LIBOR to stocks, using an equity swap. The equity swap should be structured so that

Which of the following is not a characteristic of warrants?

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

Suppose the premium on a three year, four per cent floor is equal to the premium on a three year, eight per cent cap. This combination is referred to as

The Investment Process

The Global Market Investment Decision

Securities Markets: Organization and Operation

Efficient Capital Markets

Portfolio Management

Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Professional Money Management, Alternative Assets and Industry Ethics

Evaluation of Portfolio Performance

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