1) Datacorp stock currently trades at $50. August call options on the stock with a strike
price of $55 are priced at $5.75. October call options with a strike price of $55 are
priced at $6.25. Calculate the value of the time premium between the August and
October options.
a. -$0.50
b. $0
c. $0.50
d. $5
e. -$5
2) Exhibit 19.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold
a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate
you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent.
Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year
workout period.
The value of the swap is ____ basis points in one year.
a. 26.91
b. 26.25
c. 31.25
d. 41.25
e. 51.25
3) A vertical spread involves buying and selling call options in the same stock with
a. The same time period and exercise price.
b. The same time period but different exercise price.
c. A different time period but same exercise price.
d. A different time period and different price.
e. Quotes in different options markets.
4) What is the expected return of the three stock portfolio described below?
a. 21.33%
b. 12.50%
c. 32.00%
d. 15.75%
e. 16.80%
5) In the evaluation of bond portfolio performance, the analysis effect refers to
a. The difference in portfolio duration and index duration.
b. The extra return attributable to acquiring bonds that are temporarily mispriced
relative to risk.
c. Short-run changes in the portfolio during a specific period.
d. The differential return from changing duration of the portfolio during a specific
period.
e. None of the above
6) At what point would an investor be indifferent between a GM corporate bond
yielding 9.5 percent and a tax-free municipal bond of equal financial strength if the
investor’s marginal tax rate is 25 percent?
a. 7.13%
b. 7.60%
c. 11.87%
d. 12.67%
e. 14.27%
7) Exhibit 6.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rit= return for stock i during period t
Rmt= return for the aggregate market during period t
Refer to Exhibit 6.6. Stock X had an actual return of 14% and Stock X’s normal return
based on the market’s return for the same period was 13.6%. What is Stock X’s
abnormal rate of return?
a.-0.4%
b.0.1%
c.0.4%
d.4.0%
e.6.4%
8) Someone in the 15 percent tax bracket can earn 8 percent annually on his
investments in a tax-exempt IRA account. What will be the value of a $10,000
investment after 5 years (assuming annual compounding)?
a.$ 6,805
b.$14,693
c.$15,528
d.$20,114
e.$50,000
9) Exhibit 22.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
If you establish a long strip using the options with a 90 exercise price, what is your
dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
a. $106.25 gain
b. $106.25 loss
c. $1,275.00 loss
d. $1,275.00 gain
e. $75.00 loss
10) Which of the following is not a step in the portfolio management process?
a.Develop a policy statement.
b.Study current financial and economic conditions.
c.Construct the portfolio.
d.Monitor investor’s needs and market conditions.
e.Sell all assets and reinvestment proceeds at least once a year.
11) Exhibit 23.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two
three-month issues. The corporation is concerned that interest rates will rise over the
next three months. Thus, the corporation purchases a 3 – 6 FRA whereby the
corporation pays the dealer’s quoted fixed rate of 3.5% in exchange for receiving
3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000
and that there are 60 days between month 3 and month 6.
Suppose that 3-month LIBOR is 4.0% on the rate determination day, and the contract
specified settlement in arrears at month 6, describe the transaction that occurs between
the dealer and Newport.
a. The dealer is obligated to pay Newport $125,000.
b. The dealer is obligated to pay Newport $115,000.
c. Newport is obligated to pay the dealer $125,000.
d. Newport is obligated to pay the dealer $115,000.
e. None of the above
12) Which of the following is not a characteristic of a good market for goods and
services?
a.Timely and accurate information
b.Liquidity
c.Low transaction costs
d.External efficiency
e.All of the above are characteristics of a good market.
13) Semivariance, when applied to portfolio theory, is concerned with
a. The square root of deviations from the mean.
b. All deviations below the mean.
c. All deviations above the mean.
d. All deviations.
e. The summation of the squared deviations from the mean.
14) Exhibit 8.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8
percent. You also have the following information about three stocks.
Refer to Exhibit 8.2. What is your investment strategy concerning the three stocks?
a. Buy X and Y, sell Z.
b. Sell X, Y and Z.
c. Sell X and Z, buy Y.
d. Buy X, Y and Z.
e. Buy X and Z, sell Y.
15) Recent studies indicate that due to lower transaction costs intraday patterns of
returns and volume persisted and result in profitable momentum trading strategies.
16) Duration is considered a good measure of risk for a bond portfolio because it
indicates the relative volatility of the bond or portfolio due to interest rate changes and
also the rating of the bonds.
17) Beta is a measure of unsystematic risk.
18) A growth company is a firm that has the opportunities and ability to invest capital in
projects that generate rates of return greater than the firm’s cost of debt.
19) If interest rates fall, an interest rate cap would expire unexercised.
20) Findings by Fama and French that stocks with high Book Value to Market Price
ratios tended to produce larger risk adjusted returns than stocks with low Book Value to
Market Price ratios challenge the efficacy of the CAPM.