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FIN 353 - Financial Institutions > Quiz 3 > Flashcards

Quiz 3 Flashcards

1
Q

Which type of bond incurs less interest rate risk?

a. a 5-year bond with a 9% annual coupon
b. a 5-year bond with zero coupon
c. a 10-year bond with a 9% annual coupon
d. a 10-year bond with zero coupon

A

a 5-year bond with a 9% annual coupon

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2
Q

There is a financial crisis in Europe. If the yield on IBM bonds increase, what kind of risk affected the increase in the yield?

a. downgrade risk
b. default risk
c. credit spread risk
d. reinvestment risk

A

credit spread risk

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3
Q

S&P put IBM on a watch list for a possible downgrade. If the yield on IBM bonds increase, what kind of risk affected the increase in the yield?

a. downgrade risk
b. default risk
c. credit spread risk
d. reinvestment risk

A

downgrade risk

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4
Q

Suppose Tom buys a call option contract with a strike of 4800.00%. The expiration price is $59. The premium is $5 per contract. What is the profit of the option per contract?

a. 1100.00%
b. -1100.00%
c. 0.00%
d. 600.00%

A

600.00%

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5
Q

Suppose Tom buys a call option contract with a strike of 3100.00%. The expiration price is $58. The premium is $5 per contract. What is the profit of the option per contract?

a. 2700.00%
b. -2700.00%
c. 0.00%
d. 2200.00%

A

2200.00%

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6
Q

Which is not a characteristic of the money markets?

a. high default risk
b. high liquidity
c. used to meet short-term needs
d. sold in large denominations

A

high default risk

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7
Q

Which type of bond raises money for projects at the federal government level?

a. treasury bond
b. municipal bond
c. corporate bond
d. auction rated security

A

treasury bond

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8
Q

Which type of bond raises money for projects at the state government level?

a. treasury bond
b. municipal bond
c. corporate bond
d. auction rated security

A

municipal bond

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9
Q

If you pay $975 for a 91-day T-bill. It is worth $1,000 at maturity. What is the discount rate?

a. 10.89%
b. 10.28%
c. 9.89%
d. 10.14%

A

9.89%

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10
Q

If you pay $971 for a 91-day T-bill. It is worth $1,000 at maturity. What is the discount rate?

a. 12.47%
b. 11.98%
c. 11.47%
d. 11.82%

A

11.47%

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11
Q

Which of the following risks do STRIPS incur?

a. interest rate risk
b. re-investment risk
c. purchasing power risk
d. interest rate risk and purchasing power risk

A

interest rate risk and purchasing power risk

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12
Q

The price of a 270-day commercial paper is $7,551. If the annualized yield is 2.80%, what will the paper pay at maturity?

a. $7,707
b. $7,762
c. $7,398
d. $7,345

A

$7,707

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13
Q

The price of a 270-day commercial paper is $7,556. If the annualized yield is 5.50%, what will the paper pay at maturity?

a. $7,861
b. $7,972
c. $7,263
d. $7,162

A

$7,861

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14
Q

Which risk do municipal bonds incur?

a. call risk
b. interest rate risk
c. purchasing power risk
d. credit risk
e. all of the above

A

all of the above

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15
Q

What type of money market instrument is where U.S. dollars are borrowed and loaned outside of the U.S.?

a. federal funds market
b. U.S. treasury bills
c. eurodollar
d. certificates of deposit

A

eurodollar

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16
Q

Which one is correct regarding forwards versus futures?

A. One allows you to buy or sell an asset in the future at a specified price where as the other does not.
B. Forwards have no default risk and futures do because an exchange takes on the default risk for forwards.
C. Futures are standardized and forwards are customizable.
D. Futures have limited regulation and forwards have a lot of regulation.

A

Futures are standardized and forwards are customizable.

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17
Q

During the 2008 financial crisis which Dividend Discount Model factors were NOT affected?

A. Higher expected dividends.
B. Lower growth rate.
C. Higher expected required return. D. B and C

A

Higher expected dividends.

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18
Q

Current stock price is trading at $80. You own 100 shares and put an order to sell the 100 shares at $85. What kind of order is it?

A. Market
B. Limit
C. Margin
D. Short Sale

A

Limit

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19
Q

Using the pizza example, let us assume you purchase 5 small cheese pizzas for $40 for delivery in 1 hour. The price of the pizza then goes to $42 after one hour. You receive $2 and no pizza. How did you end your futures contract?

A. Delivery
B. Cash
C. Offsetting positions

A

Cash

20
Q

Using the pizza example, let us assume you purchase 5 small cheese pizzas for $40 for delivery in 1 hour. After 30 minutes you sell a contract to sell 5 small cheese pizzas for $42. How did you end your futures contract??

A. Delivery
B. Cash
C. Offsetting positions

A

Offsetting positions

21
Q

A portfolio manager has a $85 million portfolio that tracks the S&P 500. Currently the S&P 500 is trading at $1,165. How will the manager hedge the portfolio using index futures?

A. Buy 292 futures contracts
B. Sell 292 futures contracts
C. Sell 730 futures contracts
D. Buy 730 futures contracts

A

Sell 292 futures contracts

22
Q

A portfolio manager has a $117 million portfolio that tracks the S&P 500. Currently the S&P 500 is trading at $1,035. How will the manager hedge the portfolio using index futures?

A. Buy 452 futures contracts
B. Sell 452 futures contracts
C. Sell 1130 futures contracts
D. Buy 1130 futures contracts

A

Sell 452 futures contracts

23
Q

Lauren has a margin account and deposits $50,265. Assume the margin requirement is 40.00% and Gentry Shoe Co. is selling at $32. What is the value of Lauren’s equity if the stock price falls to $26?

a. $34,557
b. $20,106
c. $41,765
d. $26,703

A

$26,703

24
Q

Lauren has a margin account and deposits $53,003. Assume the margin requirement is 40.00% and Gentry Shoe Co. is selling at $32. What is the value of Lauren’s equity if the stock price falls to $28?

a. $41,961
b. $21,201
c. $50,011
d. $36,440

A

$36,440

25
Q

Rock Solid has a stock portfolio worth $100 million, which tracks closely with the S&P 500. The portfolio manager fears that a decline is coming therefore buys put options to protect the entire portfolio when the S&P 500 was $1,001. The strike price the manager entered into was at $1,001. Suppose after a year the S&P 500 is $912 and the portfolio is worth $90 million. The options premium is $1 million. What is the value of the total position?

A. $92,556,444
B. $89,000,000
C. $98,891,109
D. $97,891,109

A

$97,891,109

26
Q

Rock Solid has a stock portfolio worth $100 million, which tracks closely with the S&P 500. The portfolio manager fears that a decline is coming therefore buys put options to protect the entire portfolio when the S&P 500 was $1,006. The strike price the manager entered into was at $1,006. Suppose after a year the S&P 500 is $954 and the portfolio is worth $91 million. The options premium is $1 million. What is the value of the total position?

A. $92,067,594
B. $90,000,000
C. $96,168,986
D. $95,168,986

A

$95,168,986

27
Q

You, Obama, and Jordan believe the current dividend and growth rate is $2 and 4%. However, you believe the discount rate is 14%, Obama believes it is 9%, Jordan believes it is 8%. What will be the prevailing price if only you three are the market participants?

A. $31.58
B. $32.84
C. $41.60
D. $52.00

A

$41.60

28
Q

You, Obama, and Jordan believe the current dividend and growth rate is $3 and 5%. However, you believe the discount rate is 13%, Obama believes it is 10%, Jordan believes it is 6%. What will be the prevailing price if only you three are the market participants?

A. $64.29
B. $67.50
C. $63.00
D. $315.00

A

$63.00

29
Q

A portfolio manager has a $103 million dollar portfolio that tracks the S&P 500. Currently the S&P 500 is trading at $1,137. How will the manager hedge the portfolio using index options??

A. Buy 906 put options contracts
B. Sell 906 put options contracts
C. Sell 362 put options contracts
D. Buy 362 put options contracts

A

Buy 906 put options contracts

30
Q

A portfolio manager has a $119 million dollar portfolio that tracks the S&P 500. Currently the S&P 500 is trading at $1,100. How will the manager hedge the portfolio using index options??

A. Buy 1082 put options contracts
B. Sell 1082 put options contracts
C. Sell 433 put options contracts
D. Buy 433 put options contracts

A

Buy 1082 put options contracts

31
Q

The expected dividend is $2 for Stock A. The growth rate is 6%. The required rate of return is 12%. Based on the Dividend Discount Model what is the estimated price of Stock A?

A. $33.33
B. $34.33
C. $34.33
D. $35.33

A

$33.33

32
Q

An investor acquires 101 shares of IBM at a price of $50 per share using 57% percent margin. If the price of the shares falls to $40, what is the stock return?

A. -46.51%
B. -35.09%
C. -44.51%
D. -20.00%

A

-35.09%

33
Q

Which of the following strike prices for a call option has a higher premium?

A. $7
B. $8
C. $9
D. $10

A

$7

34
Q

The expected dividend is $2 for Stock A. The growth rate is 8%. The required rate of return is 11%. Based on the Dividend Discount Model what is the estimated price of Stock A?

A. $66.67
B. $67.67
C. $71.00
D. $72.00

A

$66.67

35
Q

An investor acquires 150 shares of IBM at a price of $50 per share using 54% percent margin. If the price of the shares falls to $43, what is the stock return?

A. -30.43%
B. -25.93%
C. -28.43%
D. -14.00%

A

-25.93%

36
Q

Which of the following strike prices for a put option has a lower premium?

A. $3
B. $4
C. $5
D. $6

A

$3

37
Q

As interest rates in the market change over time, the market price of bonds rises and falls. What is this risk called?

A. call risk
B. interest rate risk
C. purchasing power risk
D. price risk

A

interest rate risk

38
Q

STRIPs are subject to _________ risk but are free of _________ risk.

A. interest-rate; inflation
B. default; underwriting
C. interest-rate; re-investment
D. inflation; interest-rate

A

interest-rate; re-investment

39
Q

What is the risk of the buying power of the coupon payments declining with time

A. call risk
B. interest rate risk
C. purchasing power risk
D. price risk

A

purchasing power risk

40
Q

What is the disadvantage of a call provision for a holder of a callable bond?

A. Interest rates decrease and reinvestment income stays the same.
B. Corporation buys at a higher price.
C. Interest rate falls and reinvest at a lower rate.

A

Interest rate falls and reinvest at a lower rate.

41
Q

Which of the following securities are sold via an Auction in the primary market and solely via dealers in the secondary market?

A. Corporate bond securities
B. Municipal bond securities
C. Treasury bond securities
D. A and B

A

Treasury bond securities

42
Q

Treasury inflation-indexed (TIPS) bond has a face value of $1,000. It has a coupon rate of 6.00%. The inflation rate over the year is 1.00%. What is the amount of the coupon at the end of the first year?

A. $59.41
B. $10.10
C. $60.00
D. $60.60

A

$60.60

43
Q

Treasury inflation protected securities are subject to _________ risk but are free of _________ risk.

A. interest-rate; inflation
B. default; underwriting
C. interest-rate; re-investment D. inflation; interest-rate

A

interest-rate; inflation

44
Q

Treasury inflation-indexed (TIPS) bond has a face value of $1,000. It has a coupon rate of 4.00%. The inflation rate over the year is 3.00%. What is the amount of the coupon at the end of the first year?

A. $38.83
B. $30.90
C. $40.00
D. $41.20

A

$41.20

45
Q

Which is a characteristic of the money markets?

A. Low Liquidity
B. High default risk
C. Sold in large denominations
D. Used to meet long-term needs

A

Sold in large denominations

FIN 353 - Financial Institutions (2 decks)

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