Multiple choices (Please choose the best choice.)

1. Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

A. data mining


B. fundamental analysis


C. charting


D. behavioral finance


2. Which of the following analysts focus more on past price movements of a firm’s stock than on the underlying determinants of its future profitability?

A. Credit analysts


B. Fundamental analysts


C. Systems analysts


D. Technical analysts



3. Inflation-indexed Treasury securities are commonly called ____.








4. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

A. Both bonds are examples of Eurobonds.


B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.


C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.


D. Neither bond is a Eurobond.


5. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond’s price to interest rate changes.

A. longer; higher


B. longer; lower


C. shorter; higher


D. shorter; lower

6. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.

A. $856.04


B. $891.86


C. $926.47


D. $1,000


7. All other things equal (YTM = 10%), which of the following has the longest duration?

A. A 30-year bond with a 10% coupon


B. A 20-year bond with a 9% coupon


C. A 20-year bond with a 7% coupon


D. A 10-year zero-coupon bond

8. The duration of a 5-year zero-coupon bond is ____ years.

A. 4.5


B. 5


C. 5.5


D. 3.5

9. All other things equal, a bond’s duration is _________.

A. higher when the yield to maturity is higher


B. lower when the yield to maturity is higher


C. the same at all yield rates


D. indeterminable when the yield to maturity is high

10. A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%. What is the bond’s modified duration?

A. 12 years


B. 11.1 years


C. 9.5 years


D. 8.8 years

11. The duration of a bond normally increases with an increase in:

I. Term to maturity
II. Yield to maturity
III. Coupon rate

A. I only


B. I and II only


C. II and III only


D. I, II, and III

12 You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

A. $200 profit


B. $200 loss


C. $300 profit


D. $300 loss

13 An American put option gives its holder the right to _________.

A. buy the underlying asset at the exercise price on or before the expiration date


B. buy the underlying asset at the exercise price only at the expiration date


C. sell the underlying asset at the exercise price on or before the expiration date


D. sell the underlying asset at the exercise price only at the expiration date

14 Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

A. 1


B. 10


C. 100


D. 1,000


15 You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

A. covered call


B. long straddle


C. naked call


D. money spread

16 You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

A. $120


B. $1,000


C. $11,000


D. $12,000

17 An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

A. $32.50


B. $35


C. $37.50


D. $37.60

18 A 45 put option on a stock priced at $50 is priced at $3.50. This call has an intrinsic value of ______ and a time value of _____.

A. $3.50; $0


B. $5; $3.50


C. $3.50; $5


D. $0; $3.50

19 The value of a call option increases with all of the following except ___________.

A. stock price


B. time to maturity


C. volatility


D. dividend yield







A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?

A. $0


B. $1.25


C. $4


D. $5.25






Short Answers ( Please show your steps of calculations.)


A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%.

The duration of this bond is _______ years.





You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)







You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be ____________.









24. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.






$1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 1-year interest rate 1 year from now should be about _________.










Bonus questions

26. The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

Selling a straddle would generate total premium income of _____.



27. A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately



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