FALL 2013 FIN4350 FINAL EXAM.
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 ____.
| A. | PIKs |
| B. | CARs |
| C. | TIPS |
| D. | STRIPS |
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 |
20
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.)
21.
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.
22.
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.)
23
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 _________.
25.
$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
