Chapter 2: Asset Classes and Financial Instruments Flashcards
What is a stock call?
A call is the option to buy the underlying stock at a predetermined price (the strike price) by a predetermined date (the expiry). The buyer of a call has the right to buy shares at the strike price until expiry. The seller of the call (also known as the call “writer”) is the one with the obligation.
What is a stock put?
Simply put (pun intended), a put option is a contract that gives the buyer the right — but not the obligation — to sell a particular underlying security (e.g. stock or ETF) at a predetermined price, which is known as the strike price or exercise price, within a specified window of time, or expiration date
Which stock should sell at a higher price?
A put option on a stock selling at $65 or a put option on another stock selling at $80 (all other relevant features of the stocks and options may be assumed to be identical).
A put option on a stock selling at $65 (this isn’t the price of the put, this is the price of the UNDERLYING stock!)
What is a future contract?
Cals for the delivery of an asset (or in some cases, its cash value) at the specifid delivery or maturity date for an agreed-upon price, called the future price.
What is the long position?
For futures, this is held by the trader who commits to purchasing the asset on the delivery date.
What is the short position?
The trader who take the short position commits to delivering the asset at the contract maturity.
How many bushels in future contracts for corn?
5000!
Who is obliged to buy the asset in a future contract?
The LONG buyer.
Bond market indexes can be difficult to construct because:
they cannot be based on firms’ market values.
bonds tend to trade infrequently, making price information difficult to obtain.
there are so many different kinds of bonds.
prices cannot be obtained for companies that operate in emerging markets.
corporations are not required to disclose the details of their bond issues.
bonds tend to trade infrequently, making price information difficult to obtain.
The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.25 and a bid price of 104.125. As a seller of the bond, what is the dollar price you expect to receive?
$1,048.00
$1,042.50
$1,041.25
$1,041.75
$1,040.40
104.125
An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 12% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
- 2%; 9.1%
- 2%; 8.008%
- 12%; 7.735%
- 471%; 9.1%
7.2%; 8.008%
For a taxpayer in the 12% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of
- 2%.
- 27%.
- 32%.
- 05%.
7.05%.
Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni?
- 4%
- 7%
- 5%
- 3%
- 4%
17.3%
An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 22% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.
8%; 10%
8%; 7.8%
- 4%; 8%
- 4%; 10%
8%; 7.8%
In the event of the firm’s bankruptcy,
the most shareholders can lose is their original investment in the firm’s stock.
common shareholders are the first in line to receive their claims on the firm’s assets.
bondholders have claim to what is left from the liquidation of the firm’s assets after paying the shareholders.
the claims of preferred shareholders are honored before those of the common shareholders.
the most shareholders can lose is their original investment in the firm’s stock and the claims of preferred shareholders are honored before those of the common shareholders.
the most shareholders can lose is their original investment in the firm’s stock and the claims of preferred shareholders are honored before those of the common shareholders.
