Theo-investments- 17,18,19,20

25. Interest rate futures are not currently available on which of the following securities? a. Corporate bonds b. Treasury notes c. one-month LIBOR rate d. Treasury bonds

a. Corporate bonds

26. Which of the following statements regarding classical immunization is false? a. It is easy to implement. b. It requires frequent rebalancing. c. It is not a passive bond strategy. d. It faces real-world problems in its implementation.

a. It is easy to implement.

3. Which of the following is not a reason for investors to participate in options? a. Options eliminate leverage. b. Options are a smaller investment than stock investments. c. Options allow investors to trade on the overall market movements. d. Options can reduce risk.

a. Options eliminate leverage.

14. Which of the following is a characteristic of futures contracts? They a. are marked to the market daily. b. can be sold short only on an uptick. c. are handled by specialists on futures exchanges. d. have no daily price limits.

a. are marked to the market daily.

21. The difference between the cash price and the futures price on the same asset or commodity is known as the a. basis. b. spread. c. yield spread. d. premium.

a. basis.

12. To hedge a short sale, an investor could a. buy a call. b. write a call. c. buy a put. d. write a put.

a. buy a call.

5. An option that allows the investor to buy stock under specified conditions is called a: a. call b. put c. derivative d. future

a. call

21. The __________ equates the present value of the total future dollars expected to be available at the end of a specific time period, given certain assumptions, to the price of the bond. a. horizon return b. promised return c. expected return d. coupon return

a. horizon return

22. Option prices usually: a. increase with maturity. b. are less than intrinsic values. c. decrease with a stock's volatility. d. all of the above.

a. increase with maturity.

6. Under the expectations theory, investors expecting interest rates to rise will: b. invest more now in short term bonds rather than in long term bonds. c. invest more now in long term bonds rather than in short term bonds. d. invest more now in Treasury bonds rather than in corporate bonds. e. invest more now in corporate bonds rather than in Treasury bonds.

a. invest more now in short term bonds rather than in long term bonds.

14. Other things equal, after an option first becomes available in the market a. its time value approaches zero. b. its time value increases into maturity. c. the volatility of the stock is negatively related to the value of the call. d. if it is out of the money, it will have no time value.

a. its time value approaches zero.

40. For all bonds paying coupons, duration is a. less than maturity. b. greater than maturity. c. about equal to maturity. d. not related to maturity.

a. less than maturity.

37. Convexity is largest for bonds with _________ coupons, ________ maturities, and ________ yields to maturity. a. low . . . long . . . low b. high . . . long . . . low c. low . . . short . . . low d. high . . . short . . . high

a. low . . . long . . . low

4. Under the Fisher hypothesis, if a one point increase in the inflation rate is anticipated: a. nominal rates on short-term securities would rise by one point. b. nominal rates on short-term securities would fall by one point. c. nominal rates on short-term securities would fall by less than one point. d. nominal rates on short-term securities would rise by less than one point.

a. nominal rates on short-term securities would rise by one point.

13. The Fisher hypothesis is an approximation of the a. risk-free interest rate. b. real risk-free interest rate. c. inflation rate. d. risk premium.

a. risk-free interest rate.

7. In order to have a yield to maturity greater than the coupon rate, the bond must be: a. selling at a discount. b. selling at par. c. selling at a premium. d. a zero coupon bond.

a. selling at a discount.

29. If an investor strongly believes that the stock market is going to have a sharp decline shortly, he or she could maximize profit by a. short selling stock-index futures contracts. b. hedging current short positions. c. using stock-index futures to straddle the market. d. buying stock-index futures contracts.

a. short selling stock-index futures contracts.

13. Options sold on exchanges are protected against a. stock dividends and splits. b. cash dividends. c. interest rate movements. d. inflation.

a. stock dividends and splits.

20. The real rate of interest is almost always: a. the opportunity cost of foregoing consumption. b. greater than the nominal rate of interest. c. equal to the nominal rate of interest. d. easily affected by risk factors.

a. the opportunity cost of foregoing consumption.

8. Since the 1930s, the yield curve most likely to be seen has been the: a. upward sloping yield curve. b. downward sloping yield curve. c. flat yield curve. d. skewed yield curve.

a. upward sloping yield curve.

19. A bond is selling at a discount if the: a. yield-to-maturity is greater than the coupon rate. b. yield-to-maturity is less than the coupon rate. c. market price is greater than the par value. d. yield-to-call is less than the coupon rate.

a. yield-to-maturity is greater than the coupon rate.

34. The best way to protect a stock portfolio in a bear market is to: a. Buy stock index calls. b. Buy stock index puts. c. Write stock index calls. d. Write stock index puts

b. Buy stock index puts.

24. If bond investors do not reinvest the coupons received during the life of the bond, then the a. RCY will be less than the YTM. b. RCY will exceed the YTM. c. nominal yield will be greater than the YTM. d. current yield will equal the YTM.

b. RCY will exceed the YTM.

27. Which of the following statements regarding changes in bond prices relative to changes in market yields is true? a. Short-term bond prices will increase more than long-term bond prices if market yields increase. b. Short-term bond prices will increase less than long-term bond prices if market yields decrease. c. Short-term bond prices will increase more than long-term bond prices if market yields decrease. d. Short-term bond prices will remain constant and long-term bond prices will increase if market yields decrease.

b. Short-term bond prices will increase less than long-term bond prices if market yields decrease.

27. Stock-index futures can be used to hedge against which of the following types of risks? a. Diversifiable risk b. Systematic risk c. Unsystematic risk d. Company specific risk

b. Systematic risk

11. Which of the following statements is true regarding a call writer: a. The call writer expects the stock to move upward. b. The call writer expects the stock to remain the same or move down. c. The call writer expects the stock to split. d. The call writer expects to sell the stock prior to expiration of the option.

b. The call writer expects the stock to remain the same or move down.

12. Which of the following statements concerning yield spreads is not true? a. Yield spreads may be positive or negative. b. Yield spreads are often calculated by changing the maturity of the different bonds. c. Yield spreads are influenced by the level of interest rates in the market. d. Yield spreads can change over time.

b. Yield spreads are often calculated by changing the maturity of the different bonds.

41. With regard to duration, choose the INCORRECT statement. a. Duration expands with time to maturity but at a decreasing rate. b. Yield to maturity is directly related to duration. c. Coupon is inversely related to duration. d. Duration is a measure of bond price sensitivity to interest rate movements.

b. Yield to maturity is directly related to duration.

22. Which of the following is not a passive bond strategy? a. an immunization strategy b. a bond swap strategy c. a buy and hold strategy d. an indexing strategy

b. a bond swap strategy

32. In the Black-Scholes model, a. all of the inputs except two are observable. b. all of the inputs except one are observable. c. the greater the stock price, the lower the price of the call option. d. there is an inverse relationship between the value of a call and interest rates in the market.

b. all of the inputs except one are observable.

28. An investor who sells a treasury bond futures contract is expecting to profit from a. an increase in the price of the treasury bond. b. an increase in the underlying level of interest rates. c. interest rates remaining unchanged. d. a decrease in the underlying level of interest rates.

b. an increase in the underlying level of interest rates.

30. A bond investor has $100,000 to invest and has determined 10 years is his maximum term. He puts $10,000 in one-year bonds, $10,000 in two-year bonds, $10,000 in three-year bonds, etc. all the way to $10,000 in ten-year bonds. This is an example of: a. bond equality b. bond laddering c. bond blending d. bond term management

b. bond laddering

9. When interest rates rise, a. bond prices rise. b. bond prices fall. c. prices of newly issued bonds are lowered. d. interest rates of existing bonds are raised.

b. bond prices fall.

14. Bonds with deferred call features a. can be retired at any time prior to maturity on condition that the issuer gives notice. b. can only be retired after a specified period following the date of issue. c. can be retired at any time, but the issuer will have to pay an additional premium.. d. generally have no call premium.

b. can only be retired after a specified period following the date of issue.

22. Speculators in the futures markets a. make the market more volatile. b. contribute liquidity to the market. c. engage mainly in short sales. d. serve no real economic function.

b. contribute liquidity to the market.

35. Maturity constant, increases in interest rates ___ bond prices by proportionately __ amounts than decreases in rates ___ bond prices. a. increase . . . smaller . . . increase b. decrease . . . smaller . . . increase c. decrease . . . larger . . . increase d. increase . . . larger . . . decrease

b. decrease . . . smaller . . . increase

3. The introduction of the Euro is expected to: a. increase the transactions cost of trading foreign bonds. b. decrease the transactions cost of trading foreign bonds. c. have no effect on the transactions cost of trading foreign bonds. d. have a minimal effect on the transactions cost of trading foreign bonds.

b. decrease the transactions cost of trading foreign bonds.

30. All other factors constant, the -------------- of a bond, the shorter the duration. a. longer the term b. higher the coupon rate c. higher the risk d. higher the rating

b. higher the coupon rate

17. According to the expectations theory, an upward sloping curve indicates that investors expect: a. interest rates to become more volatile in the future. b. interest rates to rise in the future. c. interest rates to fall in the future. d. interest rates to become negative in the future.

b. interest rates to rise in the future.

32. The duration of a zero coupon bond: a. is less than its term. b. is equal to its term. c. is greater than its term. d. is impossible to determine.

b. is equal to its term.

16. A major difference between the liquidity preference theory and the expectations theory is that the: a. liquidity preference theory only deals in short-term securities. b. liquidity preference theory recognizes that interest rate expectations are uncertain. c. liquidity preference theory only deals in long-term securities. d. liquidity preference theory assumes investors are risk averse and the expectations theory does not.

b. liquidity preference theory recognizes that interest rate expectations are uncertain.

21. The _________ theory of yield curves states that investors will not invest long term unless they have an economic incentive. a. expectations. b. liquidity premium c. market segmentation d. economic value added

b. liquidity premium

18. The cumulative number of futures contracts that are not offset at any point in time is called: a. margin. b. open interest. c. hedged position. d. marked to the market position.

b. open interest.

1. Another name for securities which give the holder the right to buy or sell shares of stock under specified conditions is: a. CMOs b. options c. treasury stock d. a commitment

b. options

6. Which of the following variables is not established on a futures contract? a. contract size b. price c. delivery date d. specified grade

b. price

6. An option that allows the investor to sell stock under specified conditions is called a: a. call b. put c. derivative d. future

b. put

2. Subtracting the inflation rate from the market interest rate results in an approximate: a. inflation-adjusted rate of interest b. real risk-free rate of interest c. real risky rate of interest d. inflation-adjusted yield

b. real risk-free rate of interest

9. An inverted yield curve or flattening of the yield curve is considered a good predictor of a: a. rising economy. b. recession. c. depression. d. stock market crash.

b. recession.

20. An investor with a bond portfolio wishes to protect the value of his position by using futures contracts. This investor should use a a. long hedge. b. short hedge. c. time spread. d. money spread.

b. short hedge.

34. Which of the following often emphasize short-term European securities and have been popular in recent years? a. international money market fund b. short-term world multimarket income funds c. global short-term government securities funds d. foreign short-term index funds

b. short-term world multimarket income funds

15. When calculating the yield-to-call on a bond, the stream of interest payments is __________ and the par value is replaced by the __________. a. lengthened to the call period . . . call price. b. shortened to the call period . . . call price. c. not used in the calculation . . . current market price. d. shortened to the call period . . . current market price

b. shortened to the call period . . . call price.

36. A combination of one put and one call on the same stock with the same exercise price and date is known as a: a. strip b. straddle c. strap d. spread

b. straddle

38. A combination of two calls and one put is called a: a. strip b. strap c. straddle d. spread

b. strap

9. The exercise price on an option is also known as the: a. premium. b. strike price. c. theoretical value. d. spot price.

b. strike price.

6. The yield to maturity consists solely of interest income if: a. the bond is a zero coupon bond. b. the bond was purchased at par. c. the bond was purchased above par. d. the bond was purchased below par.

b. the bond was purchased at par.

10. An appealing feature of options on futures contracts is that: a. they have longer terms until expiration. b. the purchaser has limited liability. c. losses virtually never occur. d. margin calls occur less frequently.

b. the purchaser has limited liability.

23. An option is a wasting asset because as its expiration date approaches, its a. intrinsic value approaches zero. b. time value approaches zero. c. intrinsic value approaches its time value. d. price approaches zero.

b. time value approaches zero.

20. Yield spreads tend to____ during recessions and ________ during times of economic prosperity. a. narrow . . . widen b. widen . . . narrow c. stay constant . . . widen d. widen . . . stay constant

b. widen . . . narrow

12. The face value of most bonds is: a. $100 b. $500 c. $1000 d. $10,000

c. $1000

1. One percentage point of a bond yield represents: a. 1 basis point b. 10 basis points c. 100 basis points d. 1000 basis points

c. 100 basis points

4. The standard option contract is for: a. 10 shares of stock b. 50 shares of stock c. 100 shares of stock d. 1 share of stock

c. 100 shares of stock

28. Which of the following bonds would you expect to have the greatest price volatility? a. 10%, 10 year bond b. 10%, 5 year bond c. 5%, 10 year bond d. 5%, 5 year bond

c. 5%, 10 year bond

18. The yield to maturity is 8 percent. If the yield increases by 50 basis points, the new yield is : a. 8.005 percent. b. 8.050 percent. c. 8.500 percent. d. 13.000 percent.

c. 8.500 percent.

30. Which of the following statements is TRUE? a. The speculative premium reflects the option's immediate value. b. If a call is in the money, the intrinsic value is zero. c. An option's premium almost never declines below its intrinsic value. d. If exercise price exceeds stock price, a call is "in the money."

c. An option's premium almost never declines below its intrinsic value.

34. Which of the following statements about bond prices is FALSE? a. Bond price volatility and time to maturity are directly related. b. A decrease in yields raises prices more than an increase in yields lowers prices. c. Bond price fluctuations and bond coupons are directly related. d. Bond prices move inversely to bond yields.

c. Bond price fluctuations and bond coupons are directly related.

18. According to the preferred habitat theory, which of the following is NOT true? a. Borrowers and lenders have preferred maturity sectors. b. The yield curve can take any shape. c. Borrowers and lenders do not go outside their preferred maturity segments. d. Expectations of future interest rates affects the shape of the yield curve.

c. Borrowers and lenders do not go outside their preferred maturity segments.

10. Which of the following statements is true regarding American and European options? a. American options can be exercised only at expiration. b. American options can be exercised only in the last week prior to expiration. c. European options can be exercised only at expiration. d. European options can be exercised any time prior to expiration.

c. European options can be exercised only at expiration.

19. Which of the following statements about portfolio insurance is FALSE? a. There are several methods of insuring a portfolio. b. It seeks to provide a minimum return while offering the opportunity to participate in rising prices. c. Futures are typically not used to hedge stock portfolios. d. Puts and calls typically are not used to insure portfolios.

c. Futures are typically not used to hedge stock portfolios.

33. Concerning index options, which of the following statements is FALSE? a. Index options appeal to speculators due to the leverage they offer. b. Investors can write index options. c. If exercised the holder of an index option receives the strike price. d. Index options are settled in cash.

c. If exercised the holder of an index option receives the strike price.

31. Which of the following statements regarding bond terms is FALSE? a. Short maturities protect investors when interest rates rise. b. Longer maturities have greater price fluctuations. c. Longer maturities are more liquid than shorter maturies. d. Longer maturities have a chance for larger gains.

c. Longer maturities are more liquid than shorter maturities.

26. Which of the following statements regarding the realized compound yield (RCY) is true? a. The RYC will always be higher than the YTM. b. The RYC will always be lower than the YTM. c. The RYC does not assume coupons are reinvested at the YTM. d. The RYC assumes price is below par.

c. The RYC does not assume coupons are reinvested at the YTM.

26. Select the CORRECT statement regarding basis risk associated with futures. a. Basis risk can be completely eliminated. b. Although the basis fluctuates over time, it can be precisely predicted. c. The basis must be zero on the maturity date of the contract. d. A hedge will reduce risk as long as basis fluctuations are positive.

c. The basis must be zero on the maturity date of the contract

17. Which of the following features is NOT similar between stock and futures trading? a. Buying and selling mechanics b. Existence of highly organized exchanges c. The charging of interest on margin trades d. The ability of only members to trade on the floor

c. The charging of interest on margin trades

2. A forward contract differs from a futures contract in that: a. a forward contract is for a shorter period of time. b. a forward contract does not specify the selling price. c. a forward contract does specify the selling price. d. a forward contract is non-binding.

c. a forward contract does specify the selling price.

4. A futures contract is a. a nonnegotiable, nonmarketable instrument. b. a security, like stocks and bonds. c. a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity. d. not a legal contract, and therefore its terms can be changed .

c. a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity.

15. A writer of a call can terminate that particular contract anytime before its expiration by a. writing a second call. b. buying a put. c. buying a comparable call. d. writing a put.

c. buying a comparable call.

8. Futures exchange members: a. trade strictly for their own accounts. b. trade strictly for others. c. can trade for their own accounts or for others. d. are all controlled by commodity firms.

c. can trade for their own accounts or for others.

5. Futures contracts were first traded on a. stock indexes. b. foreign currencies. c. commodities. d. government bonds.

c. commodities.

2. One important reason for the existence of derivatives is that they: a. help lower transactions costs. b. have valuable tax benefits. c. contribute to market completeness. d. are risk-free.

c. contribute to market completeness.

10. Which of the following is not a reason for a yield spread? a. differences in call features. b. differences in coupon rates. c. differences in maturity d. differences in quality.

c. differences in maturity

23. A bond strategy attempting to immunize the portfolio from interest rate risk is based on the concept of: a. buy and hold. b. horizon analysis. c. duration concept. d. indexing.

c. duration concept.

11. In the case of a futures contract, buyers can settle their positions a. only by taking delivery. b. only by arranging an offsetting contract. c. either by delivery or offset. d. by a combination of delivery and offset.

c. either by delivery or offset.

7. Futures trade on the: a. NYSE b. over-the-counter market. c. futures exchanges. e. options exchanges.

c. futures exchanges.

25. Reinvestment rate risk increases with a ________ coupon rate and a ________ term to maturity. a. low . . . short b. low . . . long c. high . . . long d. zero . . . short

c. high . . . long

25. One form of interest rate forecasting has the investor evaluating bonds being considered for purchase over a selected holding period in order to determine which will perform the best and is known as: a. holding-period analysis. b. time-series analysis. c. horizon analysis. d. duration planning.

c. horizon analysis.

21. If the price of the common stock exceeds the exercise price of a call for the holder the call is said to be a. naked. b. out of the money. c. in the money. d. covered.

c. in the money

30. An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as: a. index programming. b. arbitrage speculation. c. index arbitrage. d. program speculation.

c. index arbitrage.

4. Which of the following is considered to have the biggest impact on bond yields? a. economic growth b. business cycles c. inflation d. Federal Reserve actions

c. inflation

8. LEAPS are typically: a. cheaper than short-term options. b. more expensive than short-term options. c. less risky than short-term options. d. more risky than short-term options

c. less risky than short-term options.

2. Which of the following is not a reason U.S.investors invest in foreign bonds? a. to gain diversification b. potentially higher returns than U.S. bonds c. lower transactions costs and taxes. d. All of the above are reasons U.S. investors invest in foreign bonds.

c. lower transactions costs and taxes.

7. Which of the following yield curve theories expect investors to stay in one maturity segment, regardless of opportunities in other maturity segments? a. expectations theory b. liquidity preference theory c. market segmentation theory d. preferred habitat theory

c. market segmentation theory

15. The preferred habitat theory is most similar to the: a. expectations theory. b. liquidity preference theory. c. market segmentation theory. d. pecking order theory.

c. market segmentation theory.

31. Duration can be used to: a. minimize default risk b. minimize reinvestment risk. c. minimize interest rate risk. d. maximize return.

c. minimize interest rate risk.

12. The typical method of settling a futures contract is by: a. arbitrage. b. delivery c. offset. d. hedging.

c. offset.

33. Duration is based upon: a. future value concepts. b. compound interest. c. present value concepts. d. the Fisher hypothesis.

c. present value concepts.

29. Interest rate risk is composed of: a. market risk and default risk. b. price risk and credit risk. c. price risk and reinvestment risk. d. default risk and money risk.

c. price risk and reinvestment risk.

3. For risk-free securities, the nominal interest rate is a function of: a. actual and expected inflation rates b. expected inflation rate and expected return c. real rate of interest and expected inflation rate d. market rate of return and real rate of interest

c. real rate of interest and expected inflation rate

39. Spreads are used to: a. increase the return potential b. circumvent option commissions c. reduce risk in an option position. d. all of the above are true.

c. reduce risk in an option position.

11. The YTM calculation assumes: a. reinvestment of interest is at the coupon rate. b. no reinvestment of interest. c. reinvestment of interest is at YTM rate. d. reinvestment of interest is at the risk-free rate.

c. reinvestment of interest is at YTM rate.

32. A major advantage of bond index funds is their: a. higher performance than regular bond funds. b. ability to shelter income from taxes. c. relatively low expense ratios. d. all of the above are true,

c. relatively low expense ratios.

16. An increase in reinvestment rate risk a. is caused by an increase in interest rates. b. leads to a decline in coupon rates. c. results from a decline in interest rates. d. results from an increase in inflation.

c. results from a decline in interest rates.

19. To protect the value of a bond portfolio against a rise in interest rates using futures, the portfolio owner could execute a ____________ hedge. a. long b. duration c. short d. maturity

c. short

8. Typically, a yield to call calculation will use: a. market interest rates rate than the coupon rate. b. current market price rather than the maturity value. c. the end of the deferred call period rather than remaining years on the term. d. all of the above will be used.

c. the end of the deferred call period rather than remaining years on the term.

10. If a bond is callable, this means: a. the issuer may change the coupon rate. b. the investor may convert the bond into stock. c. the issuer may redeem the bond early. d. the investor may cash in the bond at any time.

c. the issuer may redeem the bond early.

36. Convexity is important in bond analysis because a. the price-yield relationship is imprecise. b. the relationship between bond maturity and interest rate changes is convex. c. the relationship between bond price changes and duration is an approximation. d. bonds have a convex relationship with duration.

c. the relationship between bond price changes and duration is an approximation.

7. A major difference between new shares being sold by a corporation and shares sold under a call option is that: a. there is no profit or loss under the shares sold under the call. b. there is no risk to the investor with the call. c. there is no increase in the shares outstanding with the call. d. there is no commission to the investor with the call

c. there is no increase in the shares outstanding with the call.

14. The yield curve is normally plotted using Treasury securities because: a. they have a wide range of maturities. b. it is easier to obtain accurate and complete data on them. c. they have no default risk. d. it is easier to obtain historical data on them.

c. they have no default risk

37. The two basic spreads are the: a. time spread and price spread b. put spread and call spread c. time spread and money spread d. money spread and rate spread

c. time spread and money spread

39. Duration tells us the a. actual price volatility from a bond. b. stated life of a bond. c. weighted average maturity of a bond. d. true rate of return to be earned on a bond.

c. weighted average maturity of a bond.

31. A stock is at $68. A two-month put (strike price = $70) is available at a $5 premium.. The intrinsic value is ___ and the time value is ____. a. $5 . . . $0. b. $0 . . . $5. c. $3 . . . $2. d. $2 . . . $3.

d. $2 . . . $3.

3. Futures contracts are regulated by the: a. Securities Exchange Commission. b. National Association of Security Dealers. c. National Association of Commodity Dealers. d. Commodity Futures Trading Commission.

d. Commodity Futures Trading Commission.

38. Which of the following bond relationships is NOT inverse? a. Coupon and duration b. Duration and yield to maturity c. Interest rate changes and bond prices d. Duration and maturity

d. Duration and maturity

24. Which of the following is NOT a potential advantage of speculating in futures? a. Leverage b. Ease of transacting c. Low transactions costs d. High, narrow probability distribution of expected returns

d. High, narrow probability distribution of expected returns

28. Which of the following statements is FALSE? a. An in-the-money call occurs if the stock price exceeds the exercise price. b. An out-of -the money call occurs if the stock price is less than the exercise price. c. If a call is out of the money, the intrinsic value is zero. d. If a call is in the money, the intrinsic value is zero.

d. If a call is in the money, the intrinsic value is zero.

5. Which of the following regarding the current yield on a bond is not true? a. The current yield is superior to the coupon rate because it uses market price instead of face value. b. The current yield is reported daily in The Wall Street Journal. c. The current yield does not account for difference between purchase price and redemption value. d. The current yield shows the bond's expected rate of return if held to maturity.

d. The current yield shows the bond's expected rate of return if held to maturity.

29. Which of the following statements is FALSE? a. Options are a wasting asset. b. Option prices almost always exceed intrinsic values. c. As expiration approaches, the value of the option declines to zero. d. The intrinsic value of a call is equal to its market value.

d. The intrinsic value of a call is equal to its market value.

16. Of the following statements about futures trading, which one is INCORRECT? a. There are no specialists on futures exchanges. b. All futures contracts are eligible for margin trading. c. Trading is halted for the day if the prices reach the daily limit. d. The uptick rule applies to the shorting of futures contracts.

d. The uptick rule applies to the shorting of futures contracts.

17. The writer of a naked call faces a. an unlimited potential gain. b. a specified potential loss. c. no chance of loss because this is a conservative strategy. d. a limited potential gain.

d. a limited potential gain.

27. A (an) ---------- seeks to earn a return without assuming risk by constructing riskless hedges. a. speculator b. call writer c. put writer d. arbitrageur

d. arbitrageur

19. Forward rates: a. are an average of current short-term and long-term rates. b. are observable and anticipated. c. are observable and unanticipated. d. are unobservable and anticipated

d. are unobservable and anticipated

27. Immunization is a strategy in which bond investors: a. buy only high-quality bonds. b. attempt to avoid default risk. c. attempt to avoid call and convertible risk. d. attempt to avoid reinvestment and price risk.

d. attempt to avoid reinvestment and price risk.

13. According to the expectations theory, long-term rates must; a. equal the present value of the expected cashflows from the bonds involved. b. equal the geometric mean of a series of expected future short-term rates. c. always be higher than short-term rates. d. be an average of the present and future short-term rates.

d. be an average of the present and future short-term rates.

33. Which of the following is not one of the strategies normally employed by conservative bond investors? a. flexible-income funds strategy b. buy-and-hold approach c. shorter-term Treasury bonds d. bond swaps

d. bond swaps

18. To provide insurance against declining prices on previously purchased stock, an investor could a. buy a call. b. write a put. c. buy a stock index option. d. buy a put.

d. buy a put.

17. The yield-to-call is like the yield-to-maturity except for the a. coupon payments and maturity value. b. number of periods to maturity and maturity value. c. number of periods to maturity and inflation premium. d. coupon rate and coupon payments.

d. coupon rate and coupon payments.

16. A call option written against stock owned by the writer is said to be a. naked. b. in the money. c. out of the money. d. covered.

d. covered.

11. Investors would expect a higher yield on a smaller, regional corporate bond than on a large, national corporate bond mainly due to: a. differences in coupon rates. b. differences in quality. c. differences in tax treatments. d. differences in marketability.

d. differences in marketability.

28. James wants to invest in bonds and has a 10 year investment horizon. To immunize his portfolio, he must buy bonds with durations of ----- 10 years. These bonds will have maturities -------- 10 years. a. greater than; less than b. equal to; less than c. less than; equal to d. equal to; greater than

d. equal to; greater than

20. The __________ is NOT a determinant of the value of a call option in the Black-Scholes model? a. interest rate b. exercise price of the stock c. price of the underlying stock d. expected beta of the underlying stock

d. expected beta of the underlying stock

23. One difference between a hedger and a speculator is that the hedger a. may have either a profit or a loss. b. may not close out his position by taking an opposite position. c. does not have to put up margin. d. faces a risk without the futures contract.

d. faces a risk without the futures contract.

1. Bond investors can avoid the risk that interest rates will rise and drive bond prices down by: a. buying zero coupon bonds. b. buying Treasury bonds. c. holding bonds over one year. d. holding bonds till maturity.

d. holding bonds till maturity.

13. When trading futures, margin a. is seldom used. b. indicates that credit is being extended. c. is a down payment. d. in effect, is a performance bond.

d. in effect, is a performance bond.

29. Which of the following statements about the risk premium affecting market interest rates is FALSE? The risk premium a. is often referred to as the yield differential. b. is the compensation required for the risk involved. c. can be zero. d. is not associated with the issuer's own particular situation.

d. is not associated with the issuer's own particular situation.

1. Spot markets are: a. for a limited number of commodities. b. for immediate delivery c. for future delivery. d. markets designed to attract speculators.

d. markets designed to attract speculators.

15. The initial margin required for futures trading a. is only put up by the seller. b. is only put up by the buyer. c. can be put up by either party, whoever initiates the transaction. d. must be put up by both the buyer and the seller.

d. must be put up by both the buyer and the seller.

35. Stock market index options are available on all of the following EXCEPT a. the Standard and Poor's 500 Index. b. the Major Market Index. c. the National OTC Index. d. the Shearson Lehman Hutton Index.

d. the Shearson Lehman Hutton Index.

9. On the other side of every futures transaction is: a. the dealer. b. the futures exchange. c. the commodity producer. d. the clearinghouse.

d. the clearinghouse.

24. A portfolio is said to be immunized if: a. the present value of the cashflows equals the principal. b. the duration of the portfolio is equal to the term. c. the present value of the cashflows is greater than the principal. d. the duration of the portfolio is equal to the investment horizon.

d. the duration of the portfolio is equal to the investment horizon.

5. The term structure of interest rates is also known as the: a. yield to maturity. b. probability distribution. c. yield differential. d. yield curve.

d. yield curve.

To be long a stock or option

means that you are a buyer

being short a stock or option position

means that you are a seller of the asset