Investment Exam 3 Study Guide Part 2
Treasury notes have initial maturities between ________ years.
1 and 10
You have a margin account with an initial margin requirement of 60%. You buy 19 shares of KPG at $50.4 using your full margin. In your initial Balance Sheet, how much debt do you have?
19 shares x 50.4 = 957.60 => 957.60 x (1 - 0.60) => 383.04 (Answer)
You have a margin account with an initial margin requirement of 60%. You buy 40 shares of KPG at $197.91 using your full margin. In your initial Balance Sheet, how much equity do you have?
40 shares x 197.91 = 7,916.40 => 7,916.40 x 60% => 4,749.84 (Answer)
You have a margin account with an initial margin requirement of 60%. You buy 46 shares of KPG at $188.33 using your full margin. In your initial Balance Sheet, how much equity do you have?
46 shares x 188.33 = 8,663.18 => 8,663.18 x 60% = 5,197.91 (Answer)
You have a margin account with an initial margin requirement of 60%. You short 53 shares of RSS at $17.62 using your full margin. In your initial Balance Sheet, how much equity do you have?
53 shares x 17.62 = 933.86 => 933.86 x 60% => 560.316 or 560.32 (Answer)
The most marketable money market security is _____.
Treasury bills
At contract maturity the value of a call option is ___________, where Xequals the option's strike price and ST is the stock price at contract expiration.
max (0, ST - X)
A time spread may be executed by _____.
selling an option with one expiration date and buying a similar option with a different expiration date
An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was ____.
# of shares purchased = $10,000/$25 = 400 Initial investment = $5,000 Sale price = $28(400) = $11,200 Interest on the loan = $5000(7%) = $350 Rate of Return = ($11,200 - $10,000 - $350) / 5,000 Rate of Return = 0.17 or 17% (Answer)
You purchased 100 shares of DBC at $45.08 per shares on your margin, which as an initial margin of 60% (or 0.60). You broker charges you 0.07 per year or your margin. After one year, you sell your shares at $53.38 per shares. After paying interest on your loan, what is your HPR?
100 x 45.08 = 4,508 => 4,508 x 60% = 2,704.80 => 4,508 - 2,704.8 = 1,803.20 100 x 53.38 = 5,338 => 1,803.20 + (0.07 x 1,803.20) => 1,803.20 + 126.224 => 1,929.424 5,338 - 1,929.424 = 3,408.572 => (3,408.576 - 2,704.80) / 2,704.80 => 0.260195209 or 0.2602 (Answer)
You short-sell 240 shares of GE at a price of $4.00 per share using your full margin which as an initial margin requirement of 55% (or 0.55). Your maintenance margin is set at 45% (or 0.45). At what price per share will you get your margin call?
4.00 x ((1 + 0.55) / (1 + 0.45)) => 4.275862069 or 4.28 (Answer)
You purchased 600 shares of TTB at $73.92 per shares on your margin, which as an initial margin of 65% (or 0.65). Your objective is to make a Holding Period Return of 10% (or 0.10). At what price per share will you get to your goal and sell your shares? (neglect any interest paid on your loan.)
600 x 73.92 x 65% = 28,828.80 Rate of Return = (# shares x (End. Price - Beg. Price)) / Equity 10% = (600 x (End. Price - 73.92)) / 28,828.80 28,828.80 x 10% = 600 x (End. Price - 73.92) 2,882.88 = 600x - 44,352 47,234.88 = 600x x = 78.7248 or 78.72 (Answer)
Explicit costs of an IPO tend to be around ______ of the funds raised.
7%
Several large banks manipulated the reported rates on which key money market rate?
LIBOR
All else the same, an American-style option will be ______ valuable than a ______ style option.
more; European-
You have a margin account with an initial margin requirement of 60%. You short 25 shares of RSS at $24.43 using your full margin. In your initial Balance Sheet, what is the total value of your assets?
25 x 24.43 = 610.75 => 610.75 x 60% = 366.45 => 610.75 + 366.45 = 977.20 (Answer)
Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.
25%
You have a margin account with an initial margin requirement of 60%. You short 28 shares of RSS at $17.65 using your full margin. In your initial Balance Sheet, what is the total value of your assets?
28 x 17.65 = 494.20 494.20 x 60% = 296.52 => 494.20 + 296.52 = 790.72 (Answer)
A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.
Dividend yield = Annual dividend / Current price Annual dividend = ($60 x 3%) = $1.80 Quarterly dividend = Annual dividend / 4 Quarterly dividend = (1.80 / 4) Quarterly dividend = $0.45 (Answer)
A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?
Equivalent taxable yield = 3.2% / (1 - 35%) Equivalent taxable yield = 4.92% (Answer)
A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.
Equivalent taxable yield = 6.25% / (1 - 28%) Equivalent taxable yield = 8.68% (Answer)
On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?
Gross trading profit for this security = 500 x (1003.25 - 1000.5) Gross trading profit for this security = 1375 (Answer)
You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.
Initial investment = 250($25)(0.65) = $4,062.50 Purchase price = 250($25) = $$6,250 Sale price = 250($32) = $8000 Rate of Return = ($8,000 - $6,250) / 4,062.50 Rate of Return = 0.43077 or 43% (Answer)
The interest rate charged by large banks in London to lend money among themselves is called _________.
LIBOR
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?
Maximum loss = 200 * (50 - Infinity share price) Maximum loss = Infinity loss => unlimited
A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.
Maximum loss for a put option writer = Strike price - Put option premium Maximum loss for a put option writer = 35 - 2 Maximum loss for a put option writer = $33 The maximum profit for the writer of a call option = premium received The maximum profit for the writer of a call option = $3.50 => $33; $3.50 (Answer)
The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.
NASDAQ; NYSE
A covered call strategy benefits from what environment?
Price stability
__________ often accompany short sales and are used to limit potential losses from the short position.
Stop-buy orders
What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?
Tax exempt equivalent yield = 9% x (1 - 28%) Tax exempt equivalent yield = 6.48% (Answer)
Misfit inc. sold 3,700,000 shares in an initial public offering. The underwriter's explicit fees were $78,000. The offering price for the shares was $51.97, but immediately upon issue, the share price jumped to $64.26. What is the best estimate of the total cost of the equity issue?
Total cost of equity issue = Explicit cost + Implicit cost Total cost of equity issue = 78,000 + [(64.26 - 51.97) x 3,700,000] Total cost of equity issue = 78,000 + 45,473,000 Total cost of equity issue = 45,551,000 (Answer)
An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?
Value of Stock in 1 yr = $23 x 800 = $18,400 Dividends received = $0.5 x 800 = $400 Margin loan = 40% of $16,000 = $6,400 Interest Due on margin loan = 8% of $6,400 = $512 Loan Payoff = $6400 Ending account Balance = $18,400 + $400 - $6,400 - $512 = 11,888 Return= $11,888 - $9,600 = $2,288 Return as % = $2,288/$9,600 * 100 = 23.83% (Answer)
Private placements can be advantageous, compared to public issue, because: I. Private placements are cheaper to market than public issues. II. Private placements may still be sold to the general public under SEC Rule 144A. III. Privately placed securities trade on secondary markets. a) I only b) II and III only c) I, II, and III d) I and III only
a) I only
The _________ price is the price at which a dealer is willing to sell a security.
ask
Initial margin requirements on stocks are set by _________.
the Federal Reserve
The term "underwriting syndicate" describes _______.
the investment banks that participate in the underwriting
The bid-ask spread exists because of _______________.
the need for dealers to cover expenses and make a profit
The brokers' call rate represents
the rate the broker pays its bank on borrowed funds.
DOA sold 4,600,000 shares in an initial public offering. The underwriter's explicit fees were $58,000. The offering price for the shares was $32.26, but immediately upon issue, the share price changed to $38.5. How much did DOA raised in funds?
# shares x Offer price - Explicit fees => 4,600,000 x 32.26 - 58,000 => 148,396,000 - 58,000 => 148,338,000 (Answer)
DOA sold 6,100,000 shares in an initial public offering. The underwriter's explicit fees were $57,000. The offering price for the shares was $31.84, but immediately upon issue, the share price changed to $42.82. How much did DOA raised in funds?
# shares x Offer price - Explicit fees => 6,100,000 x 31.84 - 57,000 => 194,224,000 - 57,000 => 194,167,000 (Answer)
You purchased 100 shares of TTB at $23.14 per shares on your margin, which as an initial margin of 65% (or 0.65). Your objective is to make a Holding Period Return of 20% (or 0.20). At what price per share will you get to your goal and sell your shares? (neglect any interest paid on your loan.)
100 x 23.14 x 65% = 1,504.10 Rate of Return = (# shares x (End. Price - Beg. Price)) / Equity 20% = (100 x (End. Price - 23.14)) / 1.504.10 1,504.10 x 20% = 100 x (End. Price - 23.14) 300.82 = 100x - 2,314 2,614.82 = 100x x = 26.1482 or 26.15 (Answer)
You purchase 200 shares of CUW at $19.2 using your full margin which as an initial margin of 60% (or 0.60). The maintenance margin is 35% (or 0.35). At what price will you get your margin call?" (Neglect any interest on the cash loan)
19.2 x ((1 - 0.60) / (1 - 0.35)) => 11.81538462 or 11.82 (Answer)
You short-sell 223 shares of GE at a price of $2.00 per share using your full margin which as an initial margin requirement of 55% (or 0.55). Your maintenance margin is set at 45% (or 0.45). At what price per share will you get your margin call?
2.00 x ((1 + 0.55) / (1 + 0.45)) => 2.137931034 or 2.14 (Answer)
You purchased 200 shares of DBC at $46.56 per shares on your margin, which as an initial margin of 60% (or 0.60). You broker charges you 0.05 per year or your margin. After one year, you sell your shares at $51.79 per shares. After paying interest on your loan, what is your HPR?
200 x 46.56 = 9,312 => 9,312 x 60% = 5,587.20 => 9,312 - 5,587.20 = 3,724.80 200 x 51.79 = 10,358 => 3,724.80 + (0.05 x 3,724.80) => 3,724.80 + 186.24 = 3,911.04 10,358 - 3,911.04 = 6,446.96 => (6,446.96 - 5,587.20) / 5,587.20 => 0.153880298 or 0.1539 (Answer)
You have a margin account with an initial margin requirement of 60%. You buy 22 shares of KPG at $38.76 using your full margin. In your initial Balance Sheet, how much debt do you have?
22 shares x 38.76 = 852.72 => 852.72 x (1 - 0.60) => 852.72 x 0.40 => 341.088 or 341.09 (Answer)
You purchase 100 shares of CUW at $35.51 using your full margin which as an initial margin of 70% (or 0.70). The maintenance margin is 35% (or 0.35). At what price will you get your margin call?" (Neglect any interest on the cash loan)
35.51 x ((1 - 0.70) / (1 - 0.35)) => 16.39 (Answer)
You have a margin account with an initial margin requirement of 60%. You short 39 shares of RSS at $14.87 using your full margin. In your initial Balance Sheet, how much equity do you have?
39 shares x 14.87 = 579.93 => 579.93 x 60% = 347.96 (Answer)
You buy a call with a strike of K=32 at a premium of 6.21, and you sell a call with a strike of K=36 at a premium of 2.87. What is the break-even point of the total position (that is including both options)?
6.21 - 2.87 = 3.34 => 32 + 3.34 = 35.34 (Answer)
You buy a call with a strike of K=33 at a premium of 6.78, and you sell a call with a strike of K=38 at a premium of 3.09. What is the break-even point of the total position (that is including both options)?
6.78 - 3.09 = 3.69 => 33 + 3.69 = 36.69 (Answer)
You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.
= ($300 x 30) x 50% = 9000 x 50% = $4,500 (Answer)
You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?
= 200 x 50 = 10,000 (Answer)
An investor purchases a long call at a price of $2.50. The price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor?
= 35 + 2.50 = 37.50 (Answer)
You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.
= 50 + (2500 / 200) = $62.50 (Answer)
Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.
= 500 x 40 x (1 - 0.60) = 8,000
Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?
= Underwriter Fee + no. shares x (immediate price- offer price) = 90,000 + 200,000 x (43 - 35) = 1,690,000 (Answer)
______ option can only be exercised on the expiration date.
A European
An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been ____.
A margin call will occur if Equity/Market value = .30 or less .3 = (200P - 4,000 - 240) / 200P 60P = 200P - 4,240 -140P = -4,240 P = $30.29 (Answer)
An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.
After-tax return on municipal bond (tax-exempt) = 5% After-tax return on corporate bond = Yield x (1-tax rate) After-tax return on corporate bond = 6.4 x (1 - 0.15) After-tax return on corporate bond = 5.44% => 5% and 5.44%
You have a long position in a call with a strike of K=31. The premium for the option was 8.06. What is the break-even point?
Break-even Long position call = Strike price + Premium Break-even Long position call = 31 + 8.06 Break-even Long position call = 39.06
You have a long position in a call with a strike of K=36. The premium for the option was 6.7. What is the break-even point?
Break-even Long position call = Strike price + Premium Break-even Long position call = 36 + 6.7 Break-even Long position call = 42.7 (Answer)
You have a long position in a put with a strike of K=32. The premium for the option was 9.64. What is the break-even point?
Break-even Long position put = Strike price - Premium Break-even Long position put = 32 - 9.64 Break-even Long position put = 22.36 (Answer)
You have a long position in a put with a strike of K=34. The premium for the option was 3.34. What is the break-even point?
Break-even Long position put = Strike price - Premium Break-even Long position put = 34 - 3.34 Break-even Long position put = 30.66 (Answer)
You have a short position in a call with a strike of K=27. The premium for the option was 1.96. What is the break-even point?
Break-even Short position call = Strike price + Premium Break-even Short position call = 27 + 1.96 Break-even Short position call = 28.96 (Answer)
You have a short position in a call with a strike of K=35. The premium for the option was 6.14. What is the break-even point?
Break-even Short position call = Strike price + Premium Break-even Short position call = 35 + 6.14 Break-even Short position call = 41.14 (Answer)
You have a short position in a put with a strike of K=114. The premium for the option was 2.03. What is the break-even point?
Break-even Short position put = Strike price - Premium Break-even Short position put = 114 - 2.03 Break-even Short position put = 111.97 (Answer)
You have a short position in a put with a strike of K=120. The premium for the option was 5.95. What is the break-even point?
Break-even Short position put = Strike price - Premium Break-even Short position put = 120 - 5.95 Break-even Short position put = 114.05 (Answer)
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 $.85, what is the break-even point for the investor?
Breakeven = 25 - .85 Breakeven = 24.15 (Answer)
You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)
Margin Call Price = Original Price x (( 1 - Initial Margin) / (1-Maintainance Margin)) Original Price = $50 Initial margin = 50% Maintainence Margin = 30% Margin Call Price = $50 x ( 0.71428) Margin Call Price = $35.71 (Answer)
You bought a stock at $105.53 and want to use a covered call strategy that consists in selling a call to lower the cost on the stock position. Calls with a strike K=113 are quoted with a bid of $1.06 and an ask of $1.14. What is the maximum gain on the entire strategy?
Max. Gain Cover Call = Call Premium + (Strike - Stock) Max. Gain Cover Call = 1.06 + (113 - 105.53) Max. Gain Cover Call = 1.06 + 7.47 Max. Gain Cover Call = 8.53 (Answer)
You bought a stock at $104.89 and want to use a covered call strategy that consists in selling a call to lower the cost on the stock position. Calls with a strike K=111 are quoted with a bid of $1.08 and an ask of $1.15. What is the maximum gain on the entire strategy?
Max. Gain Cover Call = Call Premium + (Strike - Stock) Max. Gain Cover Call = 1.08 + (111 - 104.89) Max. Gain Cover Call = 1.08 + 6.11 Max. Gain Cover Call = 7.19 (Answer)
You bought a stock at $68.26 and want to use a protective put strategy that consists in buying a put to protect against losses on the stock position. Puts with a strike K=60 are quoted with a bid of $1.07 and an ask of $1.19. What is the maximum loss on the entire strategy?
Max. Loss = Strike Price - Current Price - Ask Price Max. Loss = 60 - 68.26 - 1.19 Max. Loss = -9.45 or 9.45 (Answer)
You bought a stock at $66.62 and want to use a protective put strategy that consists in buying a put to protect against losses on the stock position. Puts with a strike K=63 are quoted with a bid of $1.01 and an ask of $1.23. What is the maximum loss on the entire strategy?
Max. Loss = Strike Price - Current Price - Ask Price Max. Loss = 63 - 66.62 - 1.23 Max. Loss = -4.85 or 4.85 (Answer)
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.)
Proceed from Stock = 5000 + Add:- Margin = 2500 = Total = 7500 .30 = (7500 - 200p) / 200p P = $28.85 (Answer)
You purchase a call with a strike of K=23 at a premium of 1.4 and you purchase a put with a strike of K=23 at a premium of 2.17. At maturity, the underlying is worth 15.55. What is your profit (or loss)?
Profit Call Option = Max(St - K,0) - Premium Profit Call Option = Max(15.55 - 23,0) - 1.4 Profit Call Option = -1.40 Profit Put Option = Max(K - St,0) - Premium Profit Put Option = Max(23 - 15.55,0) - 2.17 Profit Put Option = 5.28 Profit or Loss = -1.40 + 5.28 Profit or Loss = 3.88 (Answer)
You purchase a call with a strike of K=22 at a premium of 1.25 and you purchase a put with a strike of K=22 at a premium of 1.44. At maturity, the underlying is worth 15.89. What is your profit (or loss)?
Profit Call Option = Max(St - K,0) - Premium Profit Call Option = Max(15.89 - 22,0) - 1.25 Profit Call Option = -1.25 Profit Put Option = Max(K - St,0) - Premium Profit Put Option = Max(22 - 15.89,0) - 1.44 Profit Put Option = 4.67 Profit or Loss = -1.25 + 4.67 Profit or Loss = 3.42 (Answer)
Misfit inc. sold 6,400,000 shares in an initial public offering. The underwriter's explicit fees were $68,000. The offering price for the shares was $50.48, but immediately upon issue, the share price jumped to $67.7. What is the best estimate of the total cost of the equity issue?
Total cost of equity issue = Explicit cost + Implicit cost Total cost of equity issue = 68,000 + [(67.70 - 50.48) x 6,400,000] Total cost of equity issue = 68,000 + 110,208,000 Total cost of equity issue = 110,276,000 (Answer)
TIPS are ______.
Treasury bonds that protect investors from inflation
Which of the following is not a true statement regarding municipal bonds? a) A municipal bond is a debt obligation issued by state or local governments. b) A municipal bond is a debt obligation issued by the federal government. c) The interest income from a municipal bond is exempt from state and local taxation in the issuing state. d) The interest income from a municipal bond is exempt from federal income taxation.
b) A municipal bond is a debt obligation issued by the federal government.
You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls. a) I only b) I, II, and III c) I and III only d) II only
b) I, II, and III
Which of the following is not a nickname for an agency associated with the mortgage markets? a) Freddie Mac b) Sallie Mae c) Ginnie Mae d) Fannie Mae
b) Sallie Mae
Which of the following strategies makes a profit if the stock price stays stable? a) long call and short put b) short call and short put c) long call and long put d) short call and long put
b) short call and short put
Which of the following is not a characteristic of common stock ownership? a) right to any dividend paid by the corporation. b) unlimited liability c) residual claimant d) voting rights
b) unlimited liability
The _________ price is the price at which a dealer is willing to purchase a security.
bid
The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________.
bid-ask spread
A European call option gives the buyer the right to _________.
buy the underlying asset at the exercise price only at the expiration date
An investor in a T-bill earns interest by _________.
buying the bill at a discount from the face value to be received at maturity
Which of the following expressions represents the value of a call option to its holder on the expiration date? a) - (ST - X) if ST > X, 0 if ST ≤ X b) 0 if ST ≥ X, - (X - ST) if ST < X c) ST - X if ST > X, 0 if ST ≤ X d) 0 if ST ≥ X, X - ST if ST < X
c) ST - X if ST > X, 0 if ST ≤ X
Which of the following mortgage scenarios will benefit the homeowner the most? a) None of these options, as the banker's interest will always be protected. b) adjustable rate mortgage when interest rate increases. c) fixed rate mortgage when interest rate rises. d) fixed rate mortgage when interest rates falls
c) fixed rate mortgage when interest rate rises.
A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following? a) bankers' acceptance b) commercial paper c) repurchase agreement d) reverse repurchase agreement
c) repurchase agreement
Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _________.
commercial paper
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.
covered call
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) short call and short put c) long call and long put d) short call and long put
d) short call and long put
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 _________.
decrease; decrease
Eurodollars are _________.
dollar-denominated deposits at any foreign bank or foreign branch of an American bank
A dollar-denominated deposit at a London bank is called _____.
eurodollars
If the gross profit is positive and the net profit is negative, you will _________.
exercise the option
Deposits of commercial banks at the Federal Reserve are called _____.
federal funds
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 _________.
in the money
Purchases of new issues of stock take place _________.
in the primary market
What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?
increase, as the spread usually increases in response to a crisis
Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________.
inflation is higher than anticipated over the investment period
Preferred stock is like long-term debt in that ___________.
it promises to pay to its holder a fixed stream of income each year
What combination of puts and calls can simulate a long stock investment?
long call and short put
An order to buy or sell a security at the current price is a ______________.
market order
If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as ________.
market value of the stock - amount owed on the margin loan
You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.
max (-C0, ST - X - C0)
At contract maturity the value of a put option is ___________, where Xequals the option's strike price and ST is the stock price at contract expiration.
max (0, X - ST)
You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, STis the stock price at contract expiration, and P0 is the original premium of the put option.
min (P0, ST - X + P0)
You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.
money spread
What strategy could be considered insurance for an investment in a portfolio of stocks?
protective put
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.
protective put
You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.
stop-loss order
If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.
stop-loss; stop-buy
Money market securities are sometimes referred to as cash equivalents because _____.
they are safe and marketable
You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.
time spread
Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.
underpriced