FIN 307 Exam 3 MC Material

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. Callable B. Coupon C. Puttable D. Treasury

A

A bond has a 5% coupon rate. The coupon is paid semiannually and the last bond was paid 35-days ago. If the bond has a par value of $1,000, what is the accrued interest (assume 182 days in the 6-month period)? A. $4.81 B. $14.24 C. $25 D. $50

A

A firm's current assets could be sold for their $10 million book value. Its fixed assets' book value is $60 million, but could sell for $95 million. The firm's total book value debt is $40 million, but interest rate changes increased the current value of the debt to $50 million. The firm's market-to-book ratio is __________. A. 1.83 B. 1.50 C. 1.35 D. 1.46

A

A stock with a $50 current market price and a $45 strike price has an associated call option priced at $6.50. This call has an intrinsic value of __________ and a time value of __________. A. $5.00; $1.50 B. $1.50; $5.00 C. $0.00; $6.50 D. $6.50; $0.00

A

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to __________. A. Decrease; Decrease B. Decrease; Increase C. Increase; Decrease D. Increase; Increase

A

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________. A. $458.11 B. $641.11 C. $89.11 D. $1,100.11

A

All else the same, an American-style option will be __________ valuable than a __________-style option. A. More; European B. Less; European C. More; Canadian D. Less; Canadian

A

All other things equal (YTM = 10%), which of the following has the shortest duration? A. A 10-year bond with a 9% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 20-year zero-coupon bond

A

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $0.85, what is the break-even point for the investor? A. $24.15 B. $25 C. $25.87 D. $27.86

A

Assuming semiannual compounding, a 20-year zero-coupon bond with a par value of $1,000 and a required return of 12% would be priced at __________. A. $97.22 B. $104.49 C. $364.08 D. $32.14

A

Caribou Gold Mining Corporation expects to pay a $6 dividend next year. They expect their dividends to decline 3% annually. The risk-free rate is 5%, and the market portfolio's expected return is 13%. Caribou's stock beta is 0.50. Using the constant-growth DDM, the stock's intrinsic value is __________. A. $50 B. $100 C. $150 D. $200

A

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5%

A

Investor A bought a call option, and Investor B bought a put option. All else equal, if the underlying stock price volatility increases, the value of Investor A's position will __________ and the value of Investor B's position will __________. A. Increase; Increase B. Increase; Decrease C. Decrease; Increase D. Decrease; Decrease

A

The __________ is the stock price minus the exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A. Intrinsic value B. Time value C. Stated Value D. Discounted Value

A

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

A

The intrinsic value of a call option is equal to __________. A. The stock price minus the exercise price B. The exercise price minus the stock price C. The stock price minus the exercise price plus any expected dividends D. The exercise price minus the stock price plus any expected dividends

A

The maximum loss a buyer of a stock call option can suffer is the __________. A. Call premium B. Stock price C. Stock price minus the value of the call D. Strike price minus the stock price

A

The value of a put option increases with all the following except __________. A. Stock price B. Time to maturity C. Volatility D. Dividend yield

A

Two stocks, A and B, both expect to pay a $7 dividend next year. They both expect dividends to grow at 6% annually. You require a 10% return on Stock A and a 12% return on Stock B. Using the constant-growth DDM, the intrinsic value of Stock A __________. A. Will be higher than the intrinsic value of Stock B B. Will be the same as the intrinsic value of Stock B C. Will be less than the intrinsic value of Stock B D. The answer cannot be determined from the information given

A

Which of the following is a true statement? A. The actual value of a call option is greater than its intrinsic value prior to expiration B. The intrinsic value of a call option is always greater than its time value prior to expiration C. The intrinsic value of a call option is always positive prior to expiration D. The intrinsic value of a call option is greater than its actual value prior to expiration

A

Which of the following yield curves generally implies a normal, healthy economy? A. Positive slope B. Negative slope C. Flat D. Hump-shaped curve

A

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's q

A

You buy an 8-year, $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year, promised yields have risen to 7%. Your 1-year holding-period return was __________. A. 0.61% B. -5.39% C. 1.28% D. -3.25%

A

You can be sure that a bond will sell at a premium to par when __________. A. Its coupon rate is higher than its yield to maturity B. Its coupon rate is less than its yield to maturity C. Its coupon rate is equal to its yield to maturity D. Its coupon rate is less than its conversion value

A

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

A

You want to earn a 10% return on each of two stocks, A and B. Each of the stocks is expected to pay a $4 dividend in the upcoming year. The expected dividend growth rate is 6% for Stock A and 5% for Stock B. Using the constant-growth DDM, the intrinsic value of Stock A __________. A. Will be higher than the intrinsic value of Stock B B. Will be the same as the intrinsic value of Stock B C. Will be less than the intrinsic value of Stock B D. The answer cannot be determined with the information given

A

You write one MBI July 120 Call contract for a $4 premium. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a __________ on the investment. A. $300 profit B. $200 loss C. $600 loss D. $200 profit

A

A 3.209% coupon US Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is (assume 182 days in the 6-month period) __________. A. $581.90 B. $625.93 C. $232.80 D. $3,000

B

A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is __________ years. A. 7.46 B. 8.08 C. 9.02 D. 10.11

B

A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is __________. A. 4.32 B. 4 C. 3.25 D. 3.75

B

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90-days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,000.45 D. $1,012.13

B

A bond pays a semiannual coupon, and the last coupon was paid 91-days ago. If the annual coupon payment is $50, what is the accrued interest (assume 182 days in the 6-month period)? A. $13.21 B. $12.50 C. $15.44 D. $16.32

B

A call option has a $35 exercise price and a $36.50 stock price. If the call option is trading at $2.25, what is the time value embedded in the option? A. $0.00 B. $0.75 C. $1.50 D. $2.25

B

A call option on Brocklehurst Corp has an exercise price of $30. Brocklehurst Corp's current stock price is $32. The call option is __________. A. At-the-money B. In-the-money C. Out-of-the-money D. Knocked in

B

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. $926.40 D. $1,000

B

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $75.50 discount from par value. The current yield on this bond is __________. A. 6% B. 6.49% C. 6.3% D. 0%

B

A firm cuts its dividend payout ratio. As a result, you know that the firm's __________. A. Return on assets will increase B. Earnings retention ratio will increase C. Earnings growth rate will fall D. Stock price will fall

B

A put option on Dr Pepper Snapple Group, Inc has an exercise price of $45. The current stock price is $41. The put option is __________. A. At-the-money B. In-the-money C. Out-of-the-money D. Knocked out

B

A put option with several months until expiration has a $55 strike price when the stock price is $50. The option has __________ intrinsic value and __________ time value. A. Negative; Positive B. Positive; Positive C. Zero; Zero D. Zero; Positive

B

All else equal, call option values are __________ if the __________ is lower. A. Higher; Stock price B. Higher; Exercise price C. Lower; Dividend payout D. Lower; Stock volatility

B

All other things equal, a bond's duration is __________. A. Higher when the coupon rate is higher B. Lower when the coupon rate is higher C. The same when the coupon rate is higher D. Indeterminable when the coupon rate is high

B

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

B

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield for this bond? A. 4.8% B. 4.85% C. 9.6% D. 9%

B

Bonds rated __________ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B

If a stock price increases, the price of a put option on the stock will __________ and the price of a call option on the stock will __________. A. Decrease; Decrease B. Decrease; Increase C. Increase; Decrease D. Increase; Increase

B

If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is __________. A. $9,828.12 B. $9,925 C. $9,934.30 D. $9,955.43

B

If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I. You will have no interest rate risk on the bond II. In the absence of default, you can be sure you will earn the promised yield rate III. The duration of your bond is less than the time to your investment horizon A. I only B. I and II only C. II and III only D. I, II, and III

B

Investor A bought a call option, and Investor B bought a put option. All else equal, if the interest rate increases, the value of Investor A's position will __________ and the value of Investor B's position will __________. A. Increase; Increase B. Increase; Decrease C. Decrease; Increase D. Decrease; Decrease

B

New-economy companies generally have higher __________ than old-economy companies. A. Book value per share B. P/E multiples C. Profits D. Asset values

B

Strike prices of options are adjusted for __________ but not for __________. A. Dividends; Stock splits B. Stock splits; Cash dividends C. Exercise of warrants; Stock splits D. Stock price movements; Stock dividends

B

The duration of a 5-year zero-coupon bond is __________ years. A. 4.5 B. 5 C. 5.5 D. 3.5

B

The market capitalization rate on Aberdeen Wholesale Company stock is 10%, its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be __________. A. 8.33 B. 12.50 C. 19.23 D. 24.15

B

The market capitalization rate on Aberdeen Wholesale Company stock is 10%, its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be __________. A. 7.14 B. 14.29 C. 16.67 D. 22.22

B

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the exercise price. A. Negatively; Negatively B. Negatively; Positively C. Positively; Negatively D. Positively; Positively

B

The writer of a put option __________. A. Agrees to sell shares at a set price if the option holder desires B. Agrees to buy shares at a set price if the option holder desires C. Has the right to buy shares at a set price D. Has the right to sell shares at a set price

B

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

B

Todd Mountain Development Corp expects to pay a $2.50 dividend next year. They expect to grow dividends at 8% annually. The risk-free rate is 5%, and the market portfolio's expected return is 12%. Todd Mountain Development stock's beta is 0.75. Using CAPM, you should require a __________ return on this stock. A. 7.25% B. 10.25% C. 14.75% D. 21.00%

B

You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is __________. A. +1.4% B. -1.4% C. -2.51% D. +2.51%

B

You purchase one MBI July 120 Call contract for a $5 premium. You hold the option until the expiration date, when MBI 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

B

You purchase one MBI July 120 Put contract for a $3 premium. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a __________ on the investment. A. $300 profit B. $300 loss C. $500 loss D. $200 profit

B

__________ is the dollar amount per common share that could be realized by breaking-up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's q

B

A __________ bond gives the bondholder the right to cash the bond before maturity at a specific price after a specific date. A. Callable B. Coupon C. Puttable D. Treasury

C

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 __________. A. $1,035 B. $1,036 C. $1,094 D. $1,124

C

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. $0.00 B. $1.25 C. $4.00 D. $5.25

C

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is __________. A. 6% B. 0.23% C. 8.12% D. 9.45%

C

A high dividend payout will __________ the value of a call option and __________ the value of a put option. A. Increase; Decrease B. Increase; Increase C. Decrease; Increase D. Decrease; Decrease

C

A higher dividend payout policy will have a __________ impact on the value of a put and a __________ impact on the value of a call. A. Negative; Negative B. Negative; Positive C. Positive; Negative D. Positive; Positive

C

A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? A. 2 years B. 2.15 years C. 2.29 years D. 2.53 years

C

All other things equal, which of the following has the longest duration? A. A 20-year bond with a 10% coupon yielding 10% B. A 20-year bond with a 10% coupon yielding 11% C. A 20-year zero-coupon bond yielding 10% D. A 20-year zero-coupon bond yielding 11%

C

An investor purchases a call at a $2.50 premium. The strike 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

C

Banks and other financial institutions can best manage interest rate risk by __________. A. Maximizing the duration of assets and minimizing the duration of liabilities B. Minimizing the duration of assets and maximizing the duration of liabilities C. Matching the durations of their assets and liabilities D. Matching the maturities of their assets and liabilities

C

If you are holding a premium bond, you must expect a __________ each year until maturity. If you are holding a discount bond, you must expect a __________ each year until maturity (in each case, assume that the YTM remains stable). A. Capital gain; Capital loss B. Capital gain; Capital gain C. Capital loss; Capital gain D. Capital loss; Capital loss

C

In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero-coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating-rate bonds

C

Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches, the value of Investor A's position will __________ and the value of Investor B's position will __________. A. Increase; Increase B. Increase; Decrease C. Decrease; Increase D. Decrease; Decrease

C

Rose Hill Trading Company is expected to have a $6 EPS next year and an 18% ROE. An appropriate required return on this stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value in the upcoming year should be __________. A. $20.93 B. $69.77 C. $128.57 D. $150.00

C

Rose Hill Trading Company is expected to have an $8 EPS next year and an 18% ROE. An appropriate required return on this stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be __________. A. $1.12 B. $1.44 C. $2.40 D. $5.60

C

Sinking funds are commonly viewed as protecting the __________ of the bond. A. Issuer B. Underwriter C. Holder D. Dealer

C

TIPS offers investors inflation protection by __________ by the inflation rate each year. A. Increasing only the coupon rate B. Increasing only the par value C. Increasing both the par value and the coupon payment D. Increasing the promised yield to maturity

C

The __________ is the difference between the actual call price and the intrinsic value. A. Stated value B. Strike value C. Time value D. Binomial value

C

The constant-growth dividend discount model (DDM) can be used only when the __________. A. Growth rate is less than or equal to the required return B. Growth rate is greater than or equal to the required return C. Growth rate is less than the required return D. Growth rate is greater than the required return

C

The duration is independent of the coupon rate only for which one of the following? A. Discount bonds B. Premium bonds C. Perpetuities D. Short-term bonds

C

The intrinsic value of an out-of-the-money call option __________. A. Is negative B. Is positive C. Is zero D. Cannot be determined

C

The value of Internet companies is based primarily on __________. A. Current profits B. Tobin's q C. Growth opportunities D. Replacement cost

C

Westsyde Tool Company expects to pay a $1.50 dividend next year. The risk-free rate is 6%, and the market portfolio's expected return is 14%. Analysts expect a $29 Westsyde share price next year. Westsyde stock's beta is 1.20. Using CAPM, an appropriate required return on Westsyde's stock is __________. A. 8.00% B. 10.80% C. 15.60% D. 16.80%

C

Which one of the following is a common term for the market consensus value of the required return on a stock? A. Dividend payout ratio B. Intrinsic value C. Market capitalization rate D. Plowback ratio

C

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to __________. A. The dollar amount of the investment received in year t B. The percentage of the future value of the investment received in year t C. The present value of the dollar amount of the investment received in year t D. The percentage of the total present value of the investment received in year t

C

Which one of the following will increase the value of a put option? A. A decrease in the exercise price B. A decrease in time to expiration of the put C. An increase in the volatility of the underlying stock D. An increase in stock price

C

You hold a subordinated debenture in a firm. In the event of bankruptcy, you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

C

You invest in the stock of Valleyview Corp and purchase a put option on Valleyview Corp. This strategy is called a __________. A. Long straddle B. Naked put C. Protective put D. Short stroll

C

You purchase one MBI March 120 Put contract for a $10 premium. The maximum profit that you could gain from this strategy is __________. A. $120 B. $1,000 C. $11,000 D. $12,000

C

You purchased a 5-year, semiannual coupon bond six months ago. Its coupon rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual rate of return on holding the bond for this period would have been approximately __________. A. 5% B. 5.5% C. 6.01% D. 8.9%

C

You sell one IBM July 90 Call contract for a $4 premium and two puts for a $3 premium each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a __________ on this strip. A. $300 profit B. $100 loss C. $500 profit D. $200 profit

C

A Coquihalla Corporation preferred share pays an $8 dividend in perpetuity. You require a 7% return on this stock. Using the constant-growth DDM to calculate the intrinsic value, a Coquihalla Corporation preferred share is worth __________. A. $13.50 B. $45.50 C. $91.00 D. $114.29

D

A call option with several months until expiration has a $55 strike price when the stock price is $50. The option has __________ intrinsic value and __________ time value. A. Negative; Positive B. Positive; Negative C. Zero; Zero D. Zero; Positive

D

A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%. A. 7 B. 9 C. 9.39 D. 12.11

D

A stock with a $50 current market price and a $45 strike price has an associated put option priced at $3.50. This put has an intrinsic value of __________ and a time value of __________. A. $3.50; $0.00 B. $5.00; $3.50 C. $3.50; $5.00 D. $0.00; $3.50

D

A zero-coupon bond is selling at a deep discount price of $430. It matures in 13-years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond? A. 6.7-years B. 8-years C. 10-years D. 13-years

D

All other things equal (YTM = 10%), which of the following has the longest duration? A. A 30-year bond with a 5% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 5% coupon D. A 30-year zero-coupon bond

D

An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a __________ coupon and a __________ term to maturity. A. Low; Long B. High; Short C. High; Long D. Zero; Long

D

Before expiration, the time-value of an out-of-the-money stock option is __________. A. Equal to the stock price minus the exercise price B. Equal to zero C. Negative D. Positive

D

Given its time to maturity, the duration of a zero-coupon bond is __________. A. Higher when the discount rate is higher B. Higher when the discount rate is lower C. Lowest when the discount rate is equal to the risk-free rate D. The same regardless of the discount rate

D

If a firm increases its plowback ratio, this will probably result in __________ P/E ratio. A. A higher B. A lower C. An unchanged D. The answer cannot be determined from the information given

D

The May 17, 2017 price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 Call contract is __________. A. $1,980 B. $4,900 C. $5,000 D. $2,080

D

The potential loss for a writer of a naked call option on a stock is __________. A. Equal to the call premium B. Larger the lower the stock price C. Limited D. Unlimited

D

The value of a call option increases with all the following except __________. A. Stock price B. Time to maturity C. Volatility D. Dividend yield

D

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

D

Which of the following set of conditions will result in a bond with the greatest price volatility? A. A high coupon and short maturity B. A high coupon and long maturity C. A low coupon and short maturity D. A low coupon and long maturity

D

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

D

Which one of the following statements about market and book values is correct? A. All firms sell at a market-to-book ratio above 1 B. All firms sell at a market-to-book ratio greater than or equal to 1 C. All firms sell at a market-to-book ratio below 1 D. Most firms have a market-to-book ratio above 1, but not all

D

You purchase one MBI July 90 Call contract for a $4 premium. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a __________ on the investment (hint: after split, you essentially have 2 call contracts with X = $45 at a $2 premium). A. $300 profit B. $100 loss C. $400 loss D. $200 profit

D