UNIT 01.01 005 Flashcards
Which of the following would be OBLIGATED TO PURCHASE stock should the option be exercised?
A) Put writer
B) Put buyer
C) Call buyer
D) Call writer
Put writer
Remember that BUYERS HAVE RIGHTS and SELLERS HAVE OBLIGATIONS.
WRITING IS SELLING; therefore, the answer is either put or call WRITER.
If the buyer of a put has the right to sell the stock (put down), then if the contract is exercised, the seller (writer) of the put is obligated to buy the stock.
Ginnie Mae pass-throughs will pay back both principal and interest
monthly.
Ginnie Mae (GNMA) securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly.
When trading common stock, either at an exchange or over the counter, the typical size of the trading unit is
100 shares.
Common stock trades in round lots of 100 shares each. This is called a round lot (from the SIE).
Your customer purchased 100 shares of Bigco, Inc., stock at $150 a share. After holding the position for three years they sold the stock for $125 a share. What are the results of the trade?
$2,500 loss
To calculate a gain or loss subtract the cost basis ($150) from the sales proceeds ($125). 125 – 150 = –25. Remember to multiply the “per share” result by the number of shares if the question does not specify “per share.”
Your customer purchases a newly issued ABC Corporation 5% preferred stock for $100 a share. After holding the position for one year they sold the shares for $100 a share. What is the total return?
5.0%
The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (5 + 0) / 100 = 0.05 (5%).
Driscoll Discount Furniture stock trades at $25.00 a share. It has a dividend yield of 4%. What is the company’s quarterly dividend?
$0.25
A dividend yield is an annual figure. 4% of $25.00 is $1.00 (the annual dividend). Divide this figure by four to find the quarterly dividend of $0.25.
If the RST Corporation has issued several different debt securities, an investor would expect the lowest income stream from RST’s
A)
speculative bonds.
B)
convertible debentures.
C)
ordinary debentures.
D)
subordinated debentures.
convertible debentures.
Although convertible debentures have many positive features for the investor, the major negative is that, in exchange for those benefits, the investor accepts a lower rate of interest.
When comparing a short-term bond fund to a long-term bond fund, which of the following is generally true?
The short-term fund has a higher yield.
The long-term fund is less volatile.
The long-term fund has a higher yield.
The short-term fund is less volatile.
The long-term fund has a higher yield.
The short-term fund is less volatile.
The longer a bond portfolio’s average maturity, the greater the price of the fund will fluctuate when interest rates move up or down. To compensate investors for this risk, long-term bonds will offer higher yields than those with shorter maturities.
Which of the following securities is issued at par?
A)
Zero-coupon bonds
B)
Treasury notes
C)
Treasury STRIPS
D)
Treasury bills
Treasury notes
Of the securities shown, only Treasury notes issue at par and pay semiannual interest. The others issue at a discount, pay no interim interest, and are redeemed at par.
Which of the following bond prices would fluctuate the most if the interest rates fell?
A)
15-year unsecured bond with duration of 12
B)
10-year zero coupon with duration of 10
C)
20-year mortgage bond with duration of 16
D)
30-year corporate bond with duration of 14
20-year mortgage bond with duration of 16
Generally speaking, the rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. What we need to pay attention to here is not the original maturity of the bond but how much time is left. The truest measure of sensitivity (volatility) is the bonds’ duration and the greater the duration, the greater the fluctuation in price when interest rates move.
