Investment Final Conceptual

The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate I and II only I only II and III only I, II, and III

I only

The value of a call option increases with all of the following except ________. volatility time to maturity stock price dividend yield

dividend yield

Before expiration, the time value of an out-of-the-money stock option is ________. negative equal to zero positive equal to the stock price minus the exercise price

positive

The intrinsic value of a call option is equal to ________. the exercise price minus the stock price plus any expected dividends the stock price minus the exercise price the exercise price minus the stock price the stock price minus the exercise price plus any expected dividends

the stock price minus the exercise price

The time value of a call option is likely to decline most rapidly ________ days before expiration? 60 10 90 30

10

Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock. 10 1 1,000 100

100

Bonds issued in the currency of the issuer's country but sold in other national markets are called ________. Eurobonds Samurai bonds foreign bonds Yankee bonds

Eurobonds

Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product I, II, and III I and III only II only I and II only

I, II, and III

A longer time to maturity will unambiguously increase the value of a call option because: I. The longer maturity time reduces the effect of a dividend on call price. II. With a longer time to maturity the present value of the exercise price falls. III. With a longer time to maturity the range of possible stock prices at expiration increases. II and III only I only I, II, and III I and II only

II and III only

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 I only I and III only II and III only I, II, and III

II and III only

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond II, III, I I, II, III III, II, I III, I, II

III, I, II

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. Both bonds are examples of Eurobonds. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. Neither bond is a Eurobond.

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

Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price. increase decrease No typical pattern can be expected. stay the same

decrease

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 ________. increase; increase decrease; increase increase; decrease decrease; decrease

decrease; decrease

An underpriced stock provides an expected return that is ________ the required return based on the capital asset pricing model (CAPM). greater than or equal to equal to less than greater than

greater than

As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. equivalent to smaller than greater than The answer cannot be determined from the information given.

greater than

The value of Internet companies is based primarily on ________. growth opportunities replacement cost Tobin's q current profits

growth opportunities

The constant-growth dividend discount model (DDM) can be used only when the ________. growth rate is greater than the required return growth rate is less than or equal to the required return growth rate is greater than or equal to the required return growth rate is less than the required return

growth rate is less than the required return

Firms with higher expected growth rates tend to have P/E ratios that are ________ the P/E ratios of firms with lower expected growth rates. lower than equal to There is not necessarily any linkage between risk and P/E ratios. higher than

higher than

If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the ________. deviance variability volatility implied volatility

implied volatility

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is ________. at the money in the money knocked in out of the money

in the money

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 ________. at the money knocked out out of the money in the money

in the money

TIPS offer investors inflation protection by ________ by the inflation rate each year. increasing the promised yield to maturity increasing only the coupon rate increasing only the par value increasing both the par value and the coupon payment

increasing both the par value and the coupon payment

Bonds with coupon rates that fall when the general level of interest rates rise are called ________. asset-backed bonds index bonds convertible bonds inverse floaters

inverse floaters

The intrinsic value of an out-of-the-money call option ________. cannot be determined is zero is positive is negative

is zero

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________. intermediate grade junk bonds investment grade high grade

junk bonds

Everything else equal, the ________ the maturity of a bond and the ________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. longer; lower shorter; lower longer; higher shorter; higher

longer; lower

The primary difference between Treasury notes and bonds is ________. default risk coupon rate tax status maturity at issue

maturity at issue

If the economy is going into a recession, a good industry to invest in would be the ________ industry. construction automobile banking medical services

medical services

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, ST is the stock price at contract expiration, and P0 is the original premium of the put option. min(P0, ST - X + P0) max (0, ST - X - P0) max (P0, X - ST - P0) min (-P0, X - ST - P0)

min(P0, ST - X + P0)

Bond prices are ________ sensitive to changes in yield when the bond is selling at a ________ initial yield to maturity. more; lower less; lower equally; higher or lower more; higher

more; lower

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a ________. long straddle naked put short stroll protective put

protective put

A futures call option provides its holder with the right to ________. purchase a futures contract for the delivery of options on a particular stock purchase a particular stock at some time in the future at a specified price purchase a futures contract at a specified price for a specified period of time deliver a futures contract and receive a specified price at a specific date in the future

purchase a futures contract at a specified price for a specified period of time

A ________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. callable puttable coupon Treasury

puttable

Inflation is caused by ________. rapid growth of the money supply low rates of capacity utilization unions excess supply

rapid growth of the money supply

The value of a put option increases with all of the following except ________. volatility dividend yield time to maturity stock price

stock price

The divergence between an option's intrinsic value and its market value is usually greatest when ________. the option is far out of the money time to expiration is very low the option is deep in the money the option is approximately at the money

the option is approximately at the money

GDP refers to ________. the difference between government spending and government revenues the total production of goods and services in the economy the amount of personal disposable income in the economy the total manufacturing output in the economy

the total production of goods and services in the economy

Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the ________ stage of the business cycle. expansion peak trough contraction

trough

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

will be higher than the intrinsic value of stock B

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. has a Tobin's q value < 1 will generate a positive alpha has a beta > 1 has an expected return less than its required return

will generate a positive alpha

Pharmaceuticals, food, and other necessities would be good performers during the ________ stage of the business cycle. peak trough expansion contraction

contraction

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________. long straddle covered call naked call money spread

covered call

Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends. Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. All three should be willing to pay the same amount for the stock regardless of their holding period.

All three should be willing to pay the same amount for the stock regardless of their holding period.

Bonds rated ________ or better by Standard & Poor's are considered investment grade. CCC AA BB BBB

BBB

The writer of a put option ________. has the right to buy shares at a set price has the right to sell shares at a set price agrees to buy shares at a set price if the option holder desires agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires

Which one of the following will increase the value of a put option? an increase in the volatility of the underlying stock a decrease in the exercise price an increase in stock price a decrease in time to expiration of the put

an increase in the volatility of the underlying stock

Which of the following industries would most analysts classify as mature? biotechnology wireless communication auto manufacturing internet service providers

auto manufacturing

An example of a highly cyclical industry is the ________. utility industry automobile industry tobacco industry pharmaceutical industry

automobile industry

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________. both bonds will increase in value but bond B will increase more than bond A both bonds will decrease in value but bond B will decrease more than bond A both bonds will decrease in value but bond A will decrease more than bond B both bonds will increase in value but bond A will increase more than bond B

both bonds will decrease in value but bond B will decrease more than bond A

An Asian call option gives its holder the right to ________. buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life sell the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

An American call option gives the buyer the right to ________. sell the underlying asset at the exercise price on or before the expiration date buy the underlying asset at the exercise price on or before the expiration date sell the underlying asset at the exercise price only at the expiration date buy the underlying asset at the exercise price only at the expiration date

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

A European call option gives the buyer the right to ________. buy the underlying asset at the exercise price on or before the expiration date buy the underlying asset at the exercise price only at the expiration date sell the underlying asset at the exercise price only at the expiration date sell the underlying asset at the exercise price on or before the expiration date

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

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. Treasury puttable callable coupon

callable