Final Exam

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Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be

$33.00 =$22*1.50

10. You took a short position in two S&P 500 futures contracts at a price of 910 and closed the position when the index futures was 892, you incurred:

($910 - $892) X 250 X 2 = $9,000.

Bond C has a price of $711.78, 3 years until maturity. What is the yield to maturity?

12% ($1,000 - $711.78)/$711.78 = 0.404928; (1.404928)1/3 - 1.0 = 12%.

The duration of a par value bond with a coupon rate of 7% and a remaining time to maturity of 3 years is

2.81 years.

Which of the following bonds has the longest duration?

-A 10-year maturity, 0% coupon bond. -The longer the maturity and the lower the coupon, the greater the duration.

The intrinsic value of an at-the-money call option is equal to

94. Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call?

C = 48 - [45/(1.04)] + 1.50; C = $6.23.

The put/call ratio is computed as ____________, and higher values are considered ____________ signals.

A. the number of outstanding put options divided by outstanding call options; bullish or bearish

Think Tank Company has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings. A. 2.6%B. 10%C. 23.4%D. 90%E. None of these is correct

C. 23.4% 26% * 0.90 = 23.4%

50. Which of the following are used by fundamental analysts to determine proper stock prices? I) trendlines II) earnings III) dividend prospects IV) expectations of future interest rates V) resistance levels A. I, IV, and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. All five items are used by fundamental analysts.

C. II, III, and IV

The ______ is a common term for the market consensus value of the required return on a stock.A. dividend payout ratioB. intrinsic valueC. market capitalization rateD. plowback rateE. None of these is correct

C. Market Capitalization Rate

98. An option with an exercise price equal to the underlying asset's price is A. worthless. B. in the money. C. at the money. D. out of the money. E. theoretically impossible.

C. at the money.

If the currency of your country is appreciating, the result should be to ______ exports and to _______ imports. A. stimulate, stimulateB. stimulate, discourageC. discourage, stimulateD. discourage, discourageE. not affect, not affect

C. discourage, stimulate

The "real", or inflation-adjusted, exchange rate, is A. the balance of trade.B. the budget deficit.C. the purchasing power ratio.D. unimportant to the U.S. economy.E. None of these is correct.

C. the purchasing power ratio.

Agricultural futures contracts are actively traded on

All of these are correct.

9. If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct.

B. strong

_________ is equal to (common shareholders' equity/common shares outstanding).

Book value per share

____________ is a measure of the extent to which a movement in the market index is reflected in the price movements of all stocks in the market.

Breadth

An increase in the basis will __________ a long hedger and __________ a short hedger. A. hurt; benefit B. hurt; hurt C. benefit; hurt D. benefit; benefit E. benefit; have no effect upon

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities. A. technical analysts B. statistical analysts C. fundamental analysts D. dividend analysts E. psychoanalysts

16. A common strategy for passive management is A. creating an index fund. B. creating a small firm fund. C. creating an investment club. D. creating an index fund and creating an investment club. E. creating a small firm fund and creating an investment club.

A. creating an index fund.

The ______ 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 rate E. None of the options are correct

Arbel (1985) found that A. the January effect was highest for neglected firms. B. the book-to-market value ratio effect was highest in January C. the liquidity effect was highest for small firms. D. the neglected firm effect was independent of the small firm effect. E. small firms had higher book-to-market value ratios.

A. the January effect was highest for neglected firms. Arbel divided firms into highly researched, moderately researched, and neglected groups based on the number of institutions holding the stock.

The price that the buyer of a put option pays to acquire the option is called the A. strike price B. exercise price C. execution price D. acquisition price E. premium

E. Premium

The _________ is the fraction of earnings reinvested in the firm. A. dividend payout ratioB. retention rateC. plowback ratioD. dividend payout ratio and plowback ratioE. retention rate and plowback ratio

E. retention rate and plowback ratio

____________ are good examples of the limits to arbitrage because they show that the law of one price is violated. I) Siamese twin companies II) Unit trusts III) Closed-end funds IV) Open-end funds V) Equity carve-outs

I, III, and V

A call option has an intrinsic value of zero if the option is

at the money and out of the money

________ bias means that investors are too slow in updating their beliefs in response to evidence.

Conservatism

Bubba Gumm Company has an expected ROE of 9%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings. A. 90% B. 10% C. 9% D. 0.9%

The dividend discount model

includes capital gains implicitly.

The expectations hypothesis of futures pricing

is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset.

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

long, increase

Barber and Odean (2001) report that men trade __________ frequently than women.

The open interest on silver futures at a particular time is the

number of all silver futures outstanding contracts.

Open interest includes

only long or short positions but not both.

Since 1955, Treasury bond yields and earnings yields on stocks were

positively correlated.

A version of earnings management that became common in the 1990s was

reporting "pro forma earnings."

The _________ is the fraction of earnings reinvested in the firm.

retention rate and plowback ratio

If you determine that the DAX-30 index futures is overpriced relative to the spot DAX-30 index you could make an arbitrage profit by

selling DAX-30 index futures and buying all the stocks in the DAX-30.

If a stock index futures contract is overpriced, you would exploit this situation by:

selling the stock index futures and simultaneously buying the stocks in the index.

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

short, decrease

The anomalies literature

suggests that several strategies would have provided superior returns.

Futures contracts are regulated by

the Commodities Futures Trading Corporation.

The percentage change in the stock call option price divided by the percentage change in the stock price is called

the elasticity of the option

A call option on a stock is said to be out of the money if

the exercise price is higher than the stock price

A put option on a stock is said to be in the money if

the exercise price is higher than the stock price

A put option on a stock is said to be out of the money if

the exercise price is less than the call price

A put option on a stock is said to be out of the money if

the exercise price is lower than the stock price

A firm has a lower quick (or acid test) ratio than the industry average, which implies

the firm is less likely to avoid insolvency in the short run than other firms in the industry and the firm may be more profitable than other firms in the industry.

The gamma of an option is

the sensitivity of the delta to the stock price

The value of a stock put option is positively related to

the time to expiration and the exercise price

The intrinsic value of an at the money call option is equal to

zero

In an efficient market the correlation coefficient between stock returns for two nonoverlapping time periods should be

zero In an efficient market there should be no serial correlation between returns from nonoverlapping periods.

Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

$1.57/BP

On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be

$125 loss.

ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45?

$14.27 C + X/(1 + r)^T = S0 + P 9 + 45/(1.04)^1 = 38 + P P = 14.27

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.The maximum potential profit of your strategy is ________ if both options are exercised.

$200 -$100 - $5 = -$105 $2 + $105 = $107 [107+(-105)] x 100 = $200

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.The maximum potential profit of your strategy is ________ if both options are exercised.

$200 payoff: (105-100)*100 = 500 profit: 500 - (5-2)*100 = 500 - 300 = 200

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.The maximum loss you could suffer from your strategy is

$300 The max loss occurs when the asset price is less than both call options, so you don't exercise any of them. Then you're just accounting for the costs it took to operate the options. cost: 5 - 2 = 3 3*100 = -($300)

You sold one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$300 PROFIT

A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

$31.82 3.50/.11 = 31.82.

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call?

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

$4,800 -$200 + $5,000 = $4,800 (if the stock falls to zero).

Use the Black-Scholes option pricing model for the following problem. Given: SO = $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily). No dividends will be paid before option expires. The value of the call option is

$5.16

For a 200-point drop in the S&P500, by how much does the value of the futures position change?

$50,000

66. A pension fund that begins with $500,000 earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $300,000. The dollar-weighted and time-weighted rates of return, respectively, were

$500,000 + $300,000/(1 + r) = $75,000/(1 + r) + $880,000/(1 + r)2; r = 12.059%; Time- weighted average = (1.15* 1.1)1/2 -1 = .1247 = 12.47%. B. 12.1% and 12.5%

You sold one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

$5500 LOSS

33. You are a U. S. investor who purchased British securities for 2,000 pounds one year ago when the British pound cost $1.50. No dividends were paid on the British securities in the past year. Your total return based on U. S. dollars was __________ if the value of the securities is now 2,400 pounds and the pound is worth $1.60.

($3,840 - $3,000)/$3,000 = 0.28, or 28.0%.

The put-call parity theorem

- represents the proper relationship between put and call prices. - allows for arbitrage opportunities if violated. - may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered.

73. You purchase one IBM March 100 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy?

-$600 + $10,000 = $9,400 (if the stock falls to zero.)

42. Hedge fund incentive fees are essentially

D. call options on the portfolio with a strike price equal to the current portfolio value times one plus the benchmark return

The value of a call option increases with all of the following except ___________. A. stock price B. time to maturity C. volatility D. dividend yield

D. dividend yield

Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?

-Portfolio B -300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares.

An American call option allows the buyer to

-buy the underlying asset at the exercise price on or before the expiration date. -American option can be exercised at any time before expiration

The intrinsic value of an at-the-money put option is equal to

The intrinsic value of an out-of-the-money put option is equal to

If the market futures price is 1.69 A$/$, how could you arbitrage?

0.5988(1.04) −0.5917(1.03) = 0.013301; when this relationship is positive; action a will result in arbitrage profits.

Derivative securities are also called contingent claims because A. their owners may choose whether or not to exercise them B. a large contingent of investors holds them C. the writers may choose whether or not to exercise them D. their payoffs depend on the prices of other assets E. contingency management is used in adding them to portfolios

D. their payoffs depend on the prices of other assets Derivatives are securities whose prices are determined by, or derive from, the prices of other securities. Options and futures contracts are both derivative securities. The values of derivatives depend on the values of the underlying stock, commodity, index, etc.

21. Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

1% = 14% - [4% + 1.2(x - 4%)]; x = 11.5%.

Which one of the following stock index futures has a multiplier of 25 euros times the index?

DAX-30

Agricultural futures contracts are actively traded on A. rice. B. sugar. C. canola. D. rice and sugar. E. All of the options are correct.

The market-capitalization rate on the stock of Fast Growing Company is 20%. The expected ROE is 22%, and the expected EPS are $6.10. If the firm's plowback ratio is 90%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. 50.

Commodity futures pricing

1) Must be related to spot prices 2) Includes cost of carry 3) Converges to spot prices at maturity

Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 cents per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 cents per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the after-tax profit of Firm C will be _______. A. $1,680,000B. $750,000C. $510,000D. $204,000E. $306,000

E. $306,000

7. Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.

E. 0.001

A coupon bond that pays interest semi-annually is selling at par value of $1,000, matures in seven years and has a coupon rate of 8.6%. The yield to maturity on this bond is

8.6%. When a bond sells at par value, the coupon rate is equal to the yield to maturity.

Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Low Fly Airline has a beta of 3.00. The intrinsic value of the stock is A. $46.67. B. $50.00. C. $56.00. D. $62.50

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings. A. dividend-payout ratio B. degree of financial leverage C. variability of earnings D. inflation rate

Seaman had a FCFE of $4.6B last year and has 113.2M shares outstanding. Seaman's required return on equity is 11.6%, and WACC is 10.4%. If FCFE is expected to grow at 5% forever, the intrinsic value of Seaman's shares is A. $646.48. B. $64.66. C. $6,464.80 D. $6.46.

The goal of fundamental analysts is to find securities A. whose intrinsic value exceeds market price. B. with a positive present value of growth opportunities. C. with high market capitalization rates. D. All of the options are correct. E. None of the options are correct

The law of one price posits that ability to arbitrage would force prices of identical goods to trade at equal prices. However, empirical evidence suggests that __________ are often mispriced.

A. Siamese twin companies B. equity carve-outs C. closed-end funds D. Siamese twin companies and closed-end funds E. All of the options**

Which one of the following statements regarding delivery is true? A. Most futures contracts result in actual delivery. B. Only 1% to 3% of futures contracts result in actual delivery. C. Only 15% of futures contracts result in actual delivery. D. Approximately 50% of futures contracts result in actual delivery. E. Futures contracts never result in actual delivery.

You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A ____. A. will be greater than the intrinsic value of stock BB. will be the same as the intrinsic value of stock BC. will be less than the intrinsic value of stock BD. will be greater than the intrinsic value of stock B or will be the same as the intrinsic value of stock BE. None of these is correct.

C. will be less than the intrinsic value of stock B

The following price quotations on WFM were taken from the Wall Street Journal: Stock Price: 92 7/8, 92 7/8, 92 7/8 Strike Price: 85, 90, 95 February: 8 7/8, 4 1/8, 1 5/8 The premium on one WFM February 85 call contract is __________. A. $8.875 B. $887.50 C. $412.50 D. $158.00

B. $887.50 8 7/8 = $8.875 × 100 = $887.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

18. If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A. V0= (Expected Dividend Per Share in Year 1)/k B. V0= (Expected EPS in Year 1)/k C. V0= (Treasury Bond Yield in Year 1)/k D. V0= (Market return in Year 1)/k E. None of these is correct

B. V0= (Expected EPS in Year 1)/k

44. Barrier options have payoffs that A. have payoffs that only depend on the minimum price of the underlying asset during the life of the option. B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier. C. are known in advance. D. have payoffs that only depend on the maximum price of the underlying asset during the life of the option.

B. depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.

99. To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher. A. more; more B. more; less C. less; more D. less; less E. It doesn't matter—they are too risky to be included in a reasonable person's portfolio.

B. more; less

86. Common size balance sheets make it easier to compare firms ___________. A. with different degree of leverage B. of different sizes C. in different industries D. that use different inventory valuation methods (FIFO vs. LIFO) E. None of these is correct.

B. of different sizes

61. Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with ________. A. regret avoidance B. selection bias C. framing D. insider trading E. None of these is correct.

B. selection bias

Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with ________. A. regret avoidance B. selection bias C. framing D. insider trading E. none of the above

B. selection bias

long straddle

Buying both a put and a call, each with the same expiration date and exercise price, is a long straddle.

One of the problems with attempting to forecast stock market values is that A. there are no variables that seem to predict market return. B. the earnings multiplier approach can only be used at the firm level. C. the level of uncertainty surrounding the forecast will always be quite high. D. dividend-payout ratios are highly variable. E. None of the options are correct

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Paper Express's book value per share? A. $1.68 B. $2.60 C. $32.14 D. $60.71 E. None of the options are correct.

Since 1955, Treasury bond yields and earnings yields on stocks have been A. identical. B. negatively correlated. C. positively correlated. D. uncorrelated.

The dividend discount model A. ignores capital gains. B. incorporates the after-tax value of capital gains. C. includes capital gains implicitly. D. restricts capital gains to a minimum. E. None of the options are correct.

Think Tank Company has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings. A. 2.6% B. 10% C. 23.4% D. 90%

To hedge a long position in Treasury bonds, an investor would most likely A. buy interest rate futures. B. sell S&P futures. C. sell interest rate futures. D. buy Treasury bonds in the spot market. E. None of the options are correct.

The following price quotations were taken from the Wall Street Journal. Stock Price- 91 7/8 " " Strike prices- 85 90 95 February- 7 3/8 3 1/8 5/8 The premium on one February 90 call contract is A. $3.1250 B. $318.00 C. $312.50 D. $58.00 E. None of these is correct

C. $312.50 3 1/8 = $3.125 X 100 = $312.50

Patell and Woflson (1984) report that most of the stock price response to corporate dividend or earnings announcements occurs within ____________ of the announcement. A. 10 minutes B. 45 minutes C. 2 hours D. 4 hours E. 2 trading days

C. 2 hours

30. Consider these two investment strategies: Strategy __________ is the dominant strategy because __________.

C. 2, its return is at least equal to Strategy 1 and sometimes greater

High Speed Company has an expected ROE of 15%. The dividend growth rate will be ________ if the firm follows a policy of paying 50% of earnings in the form of dividends. A. 3.0%B. 4.8%C. 7.5%D. 6.0%E. None of these is correct

C. 7.5% 15%*0.50=7.5%

Commodity futures pricing __________. A. must be related to spot prices B. includes cost of carry C. converges to spot prices at maturity D. All of the options. E. None of the options.

D. All of the options.

22. Foreign currency futures contracts are actively traded on the A. Euro. B. British pound. C. Drachma. D. Euro and British pound. E. All of these are correct.

D. Euro and British pound.

56. Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A. are; are not B. are; are C. are not; are D. are not; are not E. are always; are sometimes

C. are not; are

2. The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. A. are; are B. are not; are C. are; are not D. are not; are not E. are; may or may not be

C. are; are not

4. In a futures contract the futures price is A. determined by the buyer and the seller when the delivery of the commodity takes place. B. determined by the futures exchange. C. determined by the buyer and the seller when they initiate the contract. D. determined independently by the provider of the underlying asset. E. None of these is correct.

C. determined by the buyer and the seller when they initiate the contract.

If you sold S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred __________. A. a loss of $1,500 B. a gain of $1,500 C. a loss of $750 D. a gain of $750 E. None of the options.

D. a gain of $750 ($950 - $947) X 250 = $750

Many stock analysts assume that a mispriced stock will A. immediately return to its intrinsic value. B. return to its intrinsic value within a few days. C. never return to its intrinsic value. D. gradually approach its intrinsic value over several years. E. None of the options are correct.

The Gordon model A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B. is valid only when g is less than k. C. is valid only when k is less than g. D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k. E. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g.

13. You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must A. buy one May corn futures contract. B. buy two April corn futures contract. C. sell one April corn futures contract. D. sell one May corn futures contract. E. None of these is correct.

C. sell one April corn futures contract.

The maximum loss a buyer of a stock call option can suffer is equal to

C. the call premium.

32. A call option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $11.56 B. $9.65 C. $11.82 D. $10.42

73. A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that _______. A. the stock experienced a drop in the P/E ratio B. the firm had a decrease in dividend payout ratio C. the firm increased the number of shares outstanding D. the required rate of return decreased E. None of these is correct

A. the stock experienced a drop in the P/E ratio

Speculators may use futures markets rather than spot markets because

A. transactions costs are lower in futures markets. B. futures markets provide leverage

8. If you believe in the _______ form of the EMH, you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct.

C. weak

if you believe in the _______ form of the EMH, you believe that stock prices only reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct.

C. weak

Banz (1981) found that, on average, the risk-adjusted returns of small firms A. were higher than the risk-adjusted returns of large firms. B. were the same as the risk-adjusted returns of large firms. C. were lower than the risk-adjusted returns of large firms. D. were unrelated to the risk-adjusted returns of large firms. E. were negative.

A. were higher than the risk-adjusted returns of large firms Banz found A to be true, although subsequent studies have attempted to explain the small firm effect as the January effect, the neglected firm effect, etc.

30. You want to evaluate three mutual funds using the Treynor measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, in addition to information regarding the S&P 500 index. The fund with the highest Treynor measure is __________.

A: (13% - 6%)/0.5 = 14; B: (19% - 6%)/1.0 = 13; C: (25% - 6%)/1.5 = 12.7; S&P 500: (18% - 6%)/1.0 = 12. Fund A

28. You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations and betas for the three funds are given below, as is the data for the S&P 500 index. The fund with the highest Sharpe measure is __________.

A: (18% - 4%)/38% = 0.368; B: (15% - 4%)/27% = 0.407; C: (11% - 4%)/24% = 0.292; S&P 500: (10% - 4%)/22% = 0.273. Fund B

What can investors do to check that the returns of these strategies are not simply the compensation for taking more risk?

Adjust for risk using an asset pricing model such as the CAPM for Fama-French Factor model. If the returns are proportional to risk, the strategy will have an alpha=0.

Commodity futures pricing

All of these are correct.

Financial futures contracts are actively traded on the following indices

All of these are correct.

Financial futures contracts are actively traded on the following indices except

All of these indices have actively traded futures contracts.

Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity. A. make delivery; take delivery B. take delivery; make delivery C. take delivery; take delivery D. make delivery; make delivery E. negotiate the price; pay the price

Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends. A. 4.8% B. 5.6% C. 7.2% D. 6.0%

Smart Draw Company is expected to have per share FCFE in year 1 of $1.20, per share FCFE in year 2 of $1.50, and per share FCFE in year 3 of $2.00. After year 3, per share FCFE is expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today. A. $33.00 B. $40.68 C. $55.00 D. $66.00 E. $12.16

The most appropriate discount rate to use when applying a FCFF valuation model is the A. required rate of return on equity. B. WACC. C. risk-free rate. D. required rate of return on equity or risk-free rate, depending on the debt level of the firm. E. None of the options are correct

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the return you should require on Torque's stock? A. 12.0% B. 14.6% C. 15.6% D. 20% E. None of the options are correct.

Which of the following is the best measure of the floor for a stock price? A. Book value B. Liquidation value C. Replacement cost D. Market value E. Tobin's Q

Which of the following is the most appropriate term for the bonds issued in the United States by a European corporation and denominated in U.S. dollars? (a) Domestic bonds (b) Foreign bonds (c) Eurobonds (d) European bonds

22. The price of a stock call option is __________ correlated with the stock price and __________ correlated with the striking price.

D. positively, negatively

40. The most popular approach to forecasting the overall stock market is to use A. the dividend multiplier. B. the aggregate return on assets. C. the historical ratio of book value to market value. D. the aggregate earnings multiplier. E. Tobin's Q.

D. the aggregate earnings multiplier.

68. All of the following factors affect the price of a stock option except A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. None of the options

D. the expected rate of return on the stock.

All of the following factors affect the price of a stock option except A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. None of these is correct.

D. the expected rate of return on the stock.

6. A firm has a higher asset turnover ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry. B. the firm is more likely to avoid insolvency in the short run than other firms in the industry. C. the firm is more profitable than other firms in the industry. D. the firm is utilizing assets more efficiently than other firms in the industry. E. the firm has higher spending on new fixed assets than other firms in the industry.

D. the firm is utilizing assets more efficiently than other firms in the industry.

A top down analysis of a firm starts with ___________. A. the relative value of the firmB. the absolute value of the firmC. the domestic economyD. the global economyE. the industry outlook

D. the global economy

At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with ________. A. regret avoidance B. selection bias C. overconfidence D. the lucky event issue E. none of the above

D. the lucky event issue

15. The debate over whether markets are efficient will probably never be resolved because of ________. A. the lucky event issue B. the magnitude issue C. the selection bias issue D. the lucky event issue, magnitude issue, and selection bias issue E. None of these answers are correct.

D. the lucky event issue, magnitude issue, and selection bias issue

59. A covered call position is

D. the purchase of a share of stock with a simultaneous sale of a call on that stock.

Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as ____________. A. too little; hyper rationality B. too little; conservatism C. too much; framing D. too much; memory bias

D. too much; memory bias

32. A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________. A. would be, it was a clear response to macroeconomic news B. would be, it was not a clear response to macroeconomic news C. would not be, it was a clear response to macroeconomic news D. would not be, it was not a clear response to macroeconomic news E. None of these are correct.

D. would not be, it was not a clear response to macroeconomic news

A market decline of 23% on a day when there is no significant macroeconomic event ______ consistent with the EMH because ________. A. would be, it was a clear response to macroeconomic news. B. would be, it was not a clear response to macroeconomic news. C. would not be, it was a clear response to macroeconomic news. D. would not be, it was not a clear response to macroeconomic news. E. none of the above.

D. would not be, it was not a clear response to macroeconomic news. This happened on October 19, 1987. Although this specific event is not mentioned in this edition of the book, it is an example of something that would be considered a violation of the EMH.

The difference between a random walk and a submartingale is the expected price change in a random walk is ______ and the expected price change for a submartingale is ______. A. positive; zero B. positive; positive C. positive; negative D. zero; positive E. zero; zero

D. zero; positive A random walk has an expected price change of zero and a submartingale has a positive expected price change.

A swap a) obligates two counterparties to exchange cash flows at one or more future dates. b)allows participants to restructure their balance sheets. c) allows a firm to convert outstanding fixed rate debt to floating rate debt. d)obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets. e) All the above.

Agricultural futures contracts are actively traded on A. corn. B. oats. C. pork bellies. D. corn and oats. E. All of the options are correct.

Agricultural futures contracts are actively traded on A. milk. B. orange juice. C. lumber. D. milk and orange juice. E. All of the options are correct.

Agricultural futures contracts are actively traded on A. soybeans. B. oats. C. wheat. D. soybeans and oats. E. All of the options are correct.

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today. A. $33.00 B. $39.86 C. $55.00 D. $66.00 E. $40.68

Financial futures contracts are actively traded on the following indices except A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All are actively traded.

Which of the following statements is false? I) The maintenance-margin is the amount of money you post with your broker when you buy or sell a futures contract. II) If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call. III) A margin deposit can only be met with cash. IV) All futures contracts require the same margin deposit. A. I only B. II only C. III only D. IV only E. I, III, and IV

preferred stock will pay a dividend of $7.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.75 B. $7.50 C. $64.12 D. $56.25 E. None of the options are correct

23. The confidence index is computed from ____________, and higher values are considered ____________ signals. A. bond yields; bearish B. odd lot trades; bearish C. odd lot trades; bullish D. put/call ratios; bullish E. bond yields; bullish

E) bond yields; bullish

39. The law of one price posits that ability to arbitrage would force prices of identical goods to trade at equal prices. However, empirical evidence suggests that __________ are often mispriced. A. Siamese twin companies B. equity carve-outs C. closed-end funds D. Siamese twin companies and closed-end funds E. All of the options

E. All of the options

17. Financial futures contracts are actively traded on the following indices A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All of these are correct.

E. All of these are correct.

45. Currency-translated options have A. only asset prices denoted in a foreign currency. B. only exercise prices denoted in a foreign currency. C. payoffs that only depend on the maximum price of the underlying asset during the life of the option. D. either asset or exercise prices denoted in a foreign currency.

D. either asset or exercise prices denoted in a foreign currency.

49. The lower bound on the market price of a convertible bond is A. its straight bond value. B. its crooked bond value. C. its conversion value. D. its straight bond value and its conversion value. E. None of the options

D. its straight bond value and its conversion value.

Portfolio A 300 calls (0.3) = 90 shares + 600 shares = 690 shares; 685 shares = 685 shares.

Portfolio B 300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares.

Disadvantages of options

Relatively illiquid, high transactions costs. Difficult to accumulate large positions.

Which one of the following stock index futures has a multiplier of 250?

S&P 500 Index

Distinguish between the short and long positions in futures transactions.

The trader taking the long position commits to purchase the commodity on the delivery date. The trader taking the short position commits to delivery of the commodity at contract maturity. The trader in the long position "buys" the contract; the trader in short position "sells" the contract. However, no money exchanges hands when the contract is initiated. The trader holding the long position profits from price increases. The trader in the short position profits from price decreases. The profits and losses of the two positions exactly offset each other; the futures market, in the aggregate, is a zero sum game. The terms, short and long, have different meanings for different investment alternatives.

Which of the following is/are example(s) of interest rate futures contracts?

Treasury bonds and Eurodollars

A future contract is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

True

The counter-party risk of futures contracts is lower than that of forwards contracts

True

An investor with a long position in Treasury notes futures will profit if a. interest rates of the Treasury notes decline. b. interest rates of the Treasury notes increase. c. the prices of corporate bonds increase. d. the prices of corporate bonds decrease. e. None of these is correct.

a. interest rates of the Treasury notes decline.

An interest rate cap is

an agreement in which the buyer makes a payment today in exchange for possible future payments . if a reference interest rate exceeds a specified limit.

An American call option can be exercised

any time on or before the expiration date

An American put option can be exercised

any time on or before the expiration date

Relative to European puts, otherwise identical American put options

are more valuable

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

are; are not

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

are; are not

An option with an exercise price equal to the underlying asset's price is

at the money

Delivery of stock index futures a. is never made. b. is made by a cash settlement based on the index value. c. requires delivery of 1 share of each stock in the index. d. is made by delivering 100 shares of each stock in the index. e. is made by delivering a value-weighted basket of stocks.

b. is made by a cash settlement based on the index value.

An increase in the basis will _______ a long hedger and _____ a short hedger.

benefit, hurt

An increase in the basis will __________ a long hedger and __________ a short hedger

benefit; hurt

An increase in the basis will __________ a long hedger and __________ a short hedger.

benefit; hurt

A hedge ratio for a put is always

between -1 and 0

To exploit an expected decrease in interest rates, an investor would most likely

buy Treasury bond futures

An American call option allows the buyer to

buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

An American call option allows the buyer to

buy the underlying asset at the exercise price on or before the expiration date or sell the option in the open market prior to expiration

If you determine that the DAX-30 index futures is under priced relative to the spot DAX-30 index you could make an arbitrage profit by

buying DAX-30 index futures and selling all the stocks in the DAX-30.

The maximum loss for a writer of a put option on a stock is a. unlimited. b. equal to the exercise price. c. equal to the exercise price minus the put premium d. higher than the stock price. e. equal to the put premium.

c. equal to the exercise price minus the put premium

The assumptions concerning the shape of utility functions of investors differ between conventional theory and prospect theory. Conventional theory assumes that utility functions are __________ whereas prospect theory assumes that utility functions are __________.

concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth

The premise of behavioral finance is that

conventional financial theory ignores how real people make decisions and that people make a difference.

Hedging one commodity by using a futures contract on another commodity is called

cross hedging.

If the stock price increases, the price of a put option on that stock ________, and that of a call option ________.

decreases; increases

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends.

dividend payout ratio

If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors.

forecasting

DeBondt and Thaler (1990) argue that the P/E effect can be explained by

forecasting errors and earnings expectations that are too extreme.

The Gordon model

is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.

A futures contract

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.

Taxation of futures trading gains and losses

is based on cumulative year-end profits or losses

Taxation of futures trading gains and losses

is based on cumulative year-end profits or losses.

The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put

is in the money and can be exercised profitably

The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call

is in the money and sells for more than if the market price is $21 (a less in the money option)

Credit risk in the swap market

is limited to the difference between the values of the fixed rate and floating rate obligations

The current market price of a share of a stock is $20. If a put option on this stock has a strike price of $18, the put

is out of the money

Which one of the following variables influence the value of call options?

level of interest rates, time to expiration of the option, dividend yield of underlying stock, stock price volatility

Which one of the following variables influence the value of put options?

level of interest rates, time to expiration of the option, dividend yield of underlying stock, stock price volatility

The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures.

long, short

The dollar change in the value of a stock call option is always

lower than the dollar change in the value of the stock

he efficient market hypothesis

mplies that security prices properly reflect information available to investors and that active traders will find it difficult to outperform a buy-and-hold strategy.

Higher dividend payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to lower dividend payout policies.

negative, positive

Open interest includes

only long or short positions but not both

A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______.

positive; negative Call option hedge ratios must be positive and less than 1.0, and put option ratios must be negative, with a smaller absolute value than 1.0.

The price that the buyer of a call option pays to acquire the option is called the

premium

Expiration-day volatility has been explained by

program trading to exploit arbitrage opportunities.

To hedge a long position in Treasury bonds, an investor would most likely

sell interest rate futures

You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must

sell one April corn futures contract.

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by

selling S&P 500 Index futures and buying all the stocks in the S&P 500.

If a stock index futures contract is overpriced, you would exploit this situation by

selling the stock index futures and simultaneously buying the stocks in the index

a covered call position equivalent to a

short put with a short put, the seller must buy the stock if they are going to sell it to the option buyer (assuming it is exercised)

Strike prices of options are adjusted for ____________ but not for ____________.

stock splits, cash dividends

Tests of market efficiency have focused on

strategies that would have provided superior risk-adjusted returns and results of actual investments of professional managers.

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

strike price or exercise price

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

strike price or exercise price

Prior to expiration (put)

the actual value of a put option is greater than the intrinsic value

Prior to expiration (call)

the actual value of call option is greater than the intrinsic value

The most popular approach to forecasting the overall stock market is to use

the aggregate earnings multiplier.

If a firm has a required rate of return equal to the ROE

the amount of earnings retained by the firm does not affect market price or the P/E.

Proponents of the EMH think technical analysts A. should focus on relative strength. B. should focus on resistance levels. C. should focus on support levels. D. should focus on financial statements. E. are wasting their time.

E. are wasting their time.

A put option has an intrinsic value of zero if the option is __________. A. at the money B. out of the money C. in the money D. at the money and in the money E. at the money and out of the money

E. at the money and out of the money

9. An American call option allows the buyer to A. sell the underlying asset at the exercise price on or before the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to

the call value plus the present value of the exercise price minus the stock price.

Delta is defined as

the change in the value of an option for a dollar change in the price of the underlying asset

Delta is defined as

the change in the value of an option for a dollar change in the price of the underlying asset. An option's hedge ratio (delta) is the change in the price of an option for a $1 increase in the stock price.

A hedge ratio can be computed as ___________.

the change in value of the unprotected position for a given change in the exchange rate divided by . the profit derived from one futures position for the same exchange rate

If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

the clearinghouse.

The time value of a call option is

the difference between the option's price and the value it would have if it were expiring immediately, different from the usual time value of money concept

The time value of a put option is

the difference between the option's price and the value it would have if it were expiring immediately, different from the usual time value of money concept

All of the following factors affect the price of a stock option except

the expected rate of return on the stock

All of the following factors affect the price of a stock option except

the expected return on a stock

A firm has a higher quick (or acid test) ratio than the industry average, which implies

the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry.

Some of the newer futures contracts include

weather futures. electricity futures.

A firm in the early stages of the industry life cycle will likely have _______. A. high market penetrationB. high riskC. rapid growthD. high market penetration and rapid growthE. high risk and rapid growth

E. high risk and rapid growth

6. Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. an active trading strategy and investing in an index fund E. investing in an index fund and a passive investment strategy

E. investing in an index fund and a passive investment strategy

46. Binary Options

E. Options are based on two possible outcomes - yes or no, may make a payoff of a fixed amount if a specified event happens, and may make a payoff of a fixed amount if a specified event does not happen.

24. A swap

E. obligates two counterparties to exchange cash flows at one or more future dates, allows participants to restructure their balance sheets, and allows a firm to convert outstanding fixed rate debt to floating rate debt.

3. The price that the buyer of a put option pays to acquire the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium.

E. premium.

80. Economic value added (EVA) is also known as A. excess capacity. B. excess income. C. value of assets. D. accounting value added. E. residual income.

E. residual income.

10. The _________ is the fraction of earnings reinvested in the firm. A. dividend payout ratio B. retention rate C. plowback ratio D. dividend payout ratio and plowback ratio E. retention rate and plowback ratio

E. retention rate and plowback ratio

Refer to the financial statements of Black Barn Company. The firm's leverage ratio for 2009 is ____.

$6,440,000/$4,140,000 = 1.56.

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call?

$6.23 C = 48 - [45/(1.04)] + 1.50; C = $6.23.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.20. If, at expiration, the price of a share of WFM stock is $103, your profit would be _____________.

$0 $103 - $100 = $3 - ($5 - $2) = 0 $0 × 100 = $0.

Use the two-state put option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is _____ the hedge ratio is _______.

$0 and $40, -4/7

[Show Calculation] You sold one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. a. $950 profit b. $95 profit c. $950 loss d. $95 loss e. None of these is correct

$0.19*5000=950 a. $950 profit

An analyst has determined that the intrinsic value of HPQ stock is $20 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 25, then it would be reasonable to assume the expected EPS of HPQ in the coming year is

$0.80 =$20(1/25) = $0.80

42. Suppose that the risk-free rates in the United States and in the Canada are 5% and 3%, respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

$0.80(1.05/1.03) = $0.82/ C$.

Suppose that the risk-free rates in the United States and in the Canada are 5% and 3%, respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs

$0.82/ C$

What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000.) Year 1: $925.16 Year 2: $862.57 Year 3: $788.66 Year 4: $711.00

$1,039.90 Instead of discounting all coupons at the 4 year YTM (8.9%), we should discount each coupon with the interest rate that have the same maturity as the coupon Price = 100/1.08 +100/(1.077)^2 +100/(1.082)^3 +1100/(1.089)^4 =1039.9

26. Refer to the financial statements of Black Barn Company. The firm's return on sales ratio for 2009 is _____ percent.

$1,240,000/$8,000,000 = 0.155 or 15.5%.

[Show Calculation] You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs. a. $5.50 profit b. $5,500 profit c. $5.50 loss d. $5,500 loss e. None of these is correct.

$1.10*5000=5500 b. $5,500 profit

13. Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

$1.60(1.04/1.06) = $1.57/BP.

43. Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

$1.60(1.06/1.04) = $1.63/BP.

Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

$1.63/BP

14. Suppose that the risk-free rates in the United States and in the United Kingdom are 5% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.80/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

$1.80(1.05/1.04) = $1.82/BP.

Suppose that the risk-free rates in the United States and in the United Kingdom are 5% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.80/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

$1.82/BP

$1.82/BP $1.80(1.05/1.04)= $1.82

63. Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

$100 + $5 = $105 (Breakeven). The price of the stock must increase to above $105 for the option holder to earn a profit.

45. On April 1, you bought one S&P 500 index futures contract at a futures price of 950. If on June 15th the futures price were 1012, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1012 - $950 = $62 X 250 = $15,500. $15,500 profit

On April 1, you sold one S&P 500 index futures contract at a futures price of 950. If on June 15th the futures price were 1012, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1012 − $950 = $62 × 250 = $15,500 LOSS

On April 1, you bought one S&P 500 index futures contract at a futures price of 950. If on June 15th the futures price were 1012, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$1012 − $950 = $62 × 250 = $15,500 PROFIT

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.What is the lowest stock price at which you can break even?

$103

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even?

$103 x= $100 + $5 - $2 x= $103

Given a stock index with a value of $1,000, an anticipated dividend of $30 and a risk-free rate of 6%, what should be the value of one futures contract on the index?

$1030.00

Top Flight Stock currently sells for $53. A one-year call option with strike price of $58 sells for $10, and the risk-free interest rate is 5.5%. What is the price of a one-year put with strike price of $58?

$11.97 P = 10 - 53 + 58/(1.055); P = 11.97

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call?

$12.26 C = stock price - strike price/(1 + rf) + Put price C = 103 - 100/(1.05) + 7.50 C = $12.26

HighFlyer Stock currently sells for $48. A one-year call option with strike price of $55 sells for $9, and the risk-free interest rate is 6%. What is the price of a one-year put with strike price of $55?

$12.89 put call parity equation: C + X/(1 + r)^T = S0 + P 9 + 55/(1.06)^1 = 48 + P P = 12.89

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding. SI's required return on equity is 11.3% and WACC is 9.8%. If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares are ___________.

$122.1M/12.43M = $9.823 FCFE per share; 9.823*1.07 = 10.51; 10.51/(.113-.07) = 244.42

$125 LOSS

$15.26 C + X/(1 + r)^T = S0 + P C + 100/(1.05)^1 = 103 + 7.50 C = 15.26

You sold one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$650 LOSS

You bought one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$650 PROFIT

27. Refer to the financial statements of Black Barn Company. The firm's return on equity ratio for 2009 is ____.

$660,000/[($4,140,000 + $3,680,000)/2] = .169.

You purchase one June 70 put contract for a put premium of $4. What is the maximum profit that you could gain from this strategy?

$6600 70*100 - 4*100 = 7000 - 400 = 6600

You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is

$206

You purchase one IBM 200 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is

$206 +200 + $6 = $206

86. You sold one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

$70.00 - $73.12 = -$3.12 X 1,000 = -$3,120. -$3,120

85. You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

$73.12 - $70.00 = $3.12 X 1,000 = $3,120. $3,120

You purchase one JNJ 75 call option for a premium of $3. Ignoring transaction costs, the break-even price of the position is

$78 75 + 3 = 78

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the intrinsic value of the call?

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the intrinsic value of the call?

24. Refer to the financial statements of Black Barn Company. The firm's fixed asset turnover ratio for 2009 is ____.

$8,000,000/[($3,200,000 + $3,000,000)/2] = 2.58.

What is the price of 3-year zero-coupon bond with a par value of $1,000? 0f1=0% 1f1=7% 2f1=9% 3f1=10%

$857.41 $1,000/(1.00)(1.07)(1.09)

What should the purchase price of a 3-year zero-coupon bond be if it is purchased today and has face value of $1,000? 1-year forward rate of year 1: 4.6% 1-year forward rate of year 2: 4.9% 1-year forward rate of year 2: 5.2%

$866.32 $1,000/[(1.046)(1.049)(1.052)] = $866.32.

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The "intrinsic value" of the bond today will be ______ if the coupon rate is 7%.

$886.28 FV = 1,000, PMT = 70, n = 5, i = 10, PV = 886.28

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%.

$894.51 FV = 1,000, PMT = 44, n = 14, i = 5.5, PV = 894.51

You purchased one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$950 LOSS

You sold one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$950 PROFIT

On January 1, you bought one April S&P 500 index futures contract at a futures price of 420. If on February 1 the April futures price were 430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$2500 PROFIT

Refer to the financial statements of Black Barn Company. The firm's current ratio for 2009 is ____.

$3,240,000/$1,400,000 = 2.31.

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the risk-free rate is 6%, what should be the value of a put option on the same stock with the same strike price and expiration date?

$3.00 P = 12 - 43 + 35/(1.06).5 P = $3.00

You purchased one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$300 LOSS

The following price quotations were taken from the Wall Street Journal: Stock price: 91 7/8 Strike price: 90 February: 3 1/8 The premium on one February 90 call contract is

$312.50 the premium is 3 1/8, but in shares of 100 100* 3 1/8 = 312.50

33. Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend, and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share), and sell the shares for $36.45 each. The dollar-weighted return on your investment is _______.

$36 + $30/(1 + r) = $2/(1 + r) + $4/(1 + r)2 + $72.90/(1 + r)2; r = 12.35%. 12.35%

You write one AT&T February 50 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position?

$45

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy?

$4800 50*100 - 2*100 = 5000 - 200 = 4800 An option contract includes 100 shares.

You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

$5,500 profit

. You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs

$5,500 profit $4.10-$3.00 = $1.10 x 5,000 = $5,500

44. You bought one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$5.26 - $5.13 = $0.13 X 5,000 = $650. $650 profit

$5500 PROFIT

A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27 years, the bond should sell for a price of _______ today.

$59.74 $1,000/(1.11)^27 = $59.74.

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call?

] The duration of a perpetuity with a yield of 10% is a. 13.50 years. b. 11 years. c. 6.66 years. d. cannot be determined. e. None of these is correct.

(1+YTM)/YTM b. 11 years.

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has

a dividend yield which is less than that of the average firm.

You took a short position in three S&P 500 futures contracts at a price of 900 and closed the position when the index futures was 885, you incurred:

a gain of $11,250.

You sold S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred:

a gain of $750.

You took a short position in two S&P 500 futures contracts at a price of 910 and closed the position when the index futures was 892, you incurred

a gain of $9,000

Commodity futures pricing

- must be related to spot prices. - includes cost of carry. - converges to spot prices at maturity.

In volatile markets, dynamic hedging may be difficult to implement because

- prices move too quickly for effective rebalancing - as volatility increases, historical deltas are too low - price quotes may be delayed so that correct hedge ratios cannot be computed - volatile markets may cause trading halts.

A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

-$1,150

-$1,150 −$100 + [−$1,500(0.7)] = −$1,150

A put option on Facebook (European style, with strike price of X = $60 and expiration in T = 6 months) is traded at P0 = $5. Facebook's stock price is currently S0 = $56. Facebook pays no dividends. Assume that risk free rate is rf = 0% per year. You buy $1000 worth of this put option. What will be your dollar profit/loss if the stock price ends up at ST = $70 at expiration? What if instead the price is ST = $45?

-$1000 and $2000, respectively If ST = $70, the options expire out of the money and are worth zero, so you just lose the $1000 investment. If ST = $45, each contract is worth $60 - $45 = $15, and since you bought 200 contracts ($1000/5), you make $3000 from the options. Minus the $1000 investment, you get $2000.

A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

-$345

-$345 Calculation: -$225 + [-$300(0.4)] = -$345.

A portfolio consists of 400 shares of stock and 200 calls on that stock. If the hedge ratio for the call is 0.6, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

-$520

-$520 -$400 + [-$200(0.6)] = -$520

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3.Your maximum loss from this position could be

-$800 The worst case scenario occurs when the stock price is the same as the exercise prices, so we are getting zero payoff on both options. Then we would only account for the cost of the options, which because we are buying both options, need to add together the costs of the options. This comes out to 5 + 3 = 8. (0 - 8)*100 = -800

45. A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5. What would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?

-$800 + [-$100(0.5)] = -$850.

A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5. What would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?

-$850

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be ________.

-.7 Call hedge ratio = N(d1) Put hedge ratio = N(d1) −1 0.3 − 1.0 = −0.7

If the hedge ratio for a stock call is 0.70, the hedge ratio for a put with the same expiration date and exercise price as the call would be

-0.30

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be

-0.40

If the hedge ratio for a stock call is 0.50, the hedge ratio for a put with the same expiration date and exercise price as the call would be

-0.50

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be

-0.70

You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as

a horizontal spread, or time spread (time varies between the two options) this involves the simultaneous purchase and sale of options with different expiration dates but same exercise price

A short hedge is

a long position in the spot market and a simultaneous short position in the futures market.

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is -0.30 and the stock is currently selling for $46, what is the elasticity of the put?

-2.30

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is −0.30 and the stock is currently selling for $46, what is the elasticity of the put?

-2.30! % stock price change = ($47 −$46)/$46 = 0.021739 % option price change = ($5.70 −$6.00)/$6 = −0.05 −0.05/0.021739 = −2.30.

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield to maturity.

-Bond Y because of the longer duration. -Duration is the best measure of bond price sensitivity; the longer the duration the higher the price sensitivity. Bond Y has a longer duration.

Other things equal, the price of a stock call option is positively correlated with which of the following factors?

-The stock price, time to expiration, and stock volatility -The exercise price is negatively correlated with the call option price.

The maximum loss a buyer of a stock call option can suffer is equal to

-a call premium -If an option expires worthless, all the buyer has lost is the price of the contract (premium).

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 five years, while bond B will mature in six years. If the yields to maturity on the two bonds change from 12% to 10%,

-both bonds will increase in value, but bond B will increase more than bond A. -The longer the maturity, the greater the price change when interest rates change.

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's

-coupon rate is lower. -The longer the maturity, the greater the interest-rate risk. The lower the coupon rate, the greater the interest-rate risk. The lower the yield to maturity, the greater the interest-rate risk. These concepts are reflected in the duration rules; duration is a measure of bond price sensitivity to interest rate changes (interest-rate risk).

If the stock price increases, the price of a put option on that stock __________ and that of a call option __________.

-decreases; increases -As stock prices increase, call options become more valuable (the owner can buy the stock at a bargain price). As stock prices increase, put options become less valuable (the owner can sell the stock at a price less than market price).

Trading in stock index futures

-generally results in faster execution than trading in stocks. -reduces transactions costs as compared to trading in stocks. -now exceeds buying and selling of shares in most markets. -increases leverage as compared to trading in stocks.

A $1 decrease in a call option s exercise price would result in a(n) __________ in the call option s value of __________ one dollar.

-increase; less than -Option prices are less than stock prices, thus changes in stock prices (market or exercise) are greater (in absolute terms) than are changes in prices of options.

According to the expectations hypothesis, an upward sloping yield curve implies that

-interest rates are expected to increase in the future. -An upward sloping yield curve is based on the expectation that short-term interest rates will increase.

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call

-is at the money. -If the striking price on a call option is equal to the market price, the option is at the money.

The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call

-is in the money and sells for a higher price than if the market price of AT&T stock is $40. -If the striking price on a call option is less than the market price, the option is in the money and sells for more than an out of the money option.

An inverted yield curve implies that

-long-term interest rates are lower than short-term interest rates. -The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observed frequently, although not as frequently as the upward sloping, or normal, yield curve.

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be

-lower This bond is a premium bond as interest rates have declined since the bond was issued. If interest rates remain constant, the price of a premium bond declines as the bond approaches maturity.

A swap

-obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets and allows a firm to convert outstanding fixed rate debt to floating rate debt. allows

A European put option allows the holder to

-sell the underlying asset at the striking price on the expiration date -potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

A put option on a stock is said to be out of the money if

-the exercise price is less than the stock price. -An out of the money put option gives the owner the right to sell the shares for less than market price.

The maximum loss a buyer of a stock put option can suffer is equal to

-the put premium. -If an option expires worthless, all the buyer has lost is the price of the contract (premium).

All the inputs in the Black-Scholes option pricing model are directly observable except

-the variance of returns of the underlying asset return -The variance of the returns of the underlying asset is not directly observable, but must be estimated from historical data, from scenario analysis, or from the prices of other options.

The value of a stock put option is positively related to

-time to expiration and strike price -The time to expiration and striking price are positively related to the value of a put option; the stock price is inversely related to the value of the option.

The potential loss for a writer of a naked call option on a stock is

-unlimited -If the buyer of the option elects to exercise the option and buy the stock at the exercise price, the seller of the option must go into the open market and buy the stock (in order to sell the stock to the buyer of the contract) at the current market price. Theoretically, the market price of a stock is unlimited; thus the writer's potential loss is unlimited.

[Show Calculation] An 8% coupon (annual payment), 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25 basis points, how much change approximately will there be in the bond's price? a. 1.83% b. 2.01% c. 3.27% d. 6.44% e. None of these is correct

.25% * (8.05/1.1) = 1.83% a. 1.83%

In the Black-Scholes model, if an option is not likely to be exercised, both N(d1) and N(d2) will be close to ______. If the option is definitely likely to be exercised, N(d1) and N(d2) will be close to ______.

0 , 1

22. Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

0% = 16% - [3% + 1.75(x - 3%)]; x = 10.4%.

A protective put strategy is

a long put plus a long position in the underlying asset if you want to invest in a stock but want to hedge your losses past a certain point, you can purchase a stock and purchase a put option too. no matter what happens to the stock price, you are guaranteed a payoff at least equal to the exercise price because you can sell the shares for that price

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3.Your strategy is called

a long straddle buying both a put and a call with the same exercise price and expiration date is called a long straddle.

You purchased one S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred:

a loss of $750

You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as

a money, or vertical spread (the variable that differs between the two options) this involves the simultaneous purchase and sale of options with different exercise prices and the same expiration date. profit equals the difference between the value of the purchase and the sale.

A put option on the S&P 500 index will best protect

a portfolio that corresponds to the S&P 500.

23. You hold a $50 million portfolio of par value bonds with a coupon rate of 10 percent paid annually and 15 years to maturity. How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18%? Assume the market interest rate is 10 percent and that T-bond futures contracts call for delivery of an 8 percent coupon (paid annually), 20-year maturity T-bond.

0.9864485 X $50 M = $49,322,425; $50,000,000 - $49,322,425 = $677,575 loss on bonds; $100.00 - $82.97 = $17.03 X 100 = $1703 gain on futures; $677,575/$1,703 = 398 contracts short. 398 contracts short

As the underlying stock's price increased, the call option valuation function's slope approaches

Which of the following statements about the global bond market are true?

1) Bonds issued in the US by a non-US corporation must satisfy the disclosure requirements of the US SEC 2) Two bond indexes of the same market tend to be highly correlated, even if their composition is somewhat different 3) It is not necessary that a bond be denominated in euros for it to be termed a Eurobond

The duration of a bond is a function of the bond's

1) Coupon rate 2) YTM 3) Time to Maturity

Investors can use publicly available financial date to determine which of the following?

1) The shape of the yield curve 2) Expected future short-term rates (if liquidity premiums are ignored)

After academics discover and publish an anomaly, its profitability usually decreases substantially. What are the two reasons for why the profitability declines?

1. Data mining and/or regime shifts. The anomaly might be spurious or specific only to the academics' sample period. 2. Weak-form market efficiency. Now that the anomaly is part of the historical information set, traders will attempt to profit from it.

Briefly describe three theories explaining the shape of the term structure of interest rates.

1. Expectations Theory: Forward rates represent the markets expectation of future short term interest rates 2. Liquidity Preference Theory: Investors require additional compensation for longer-term investments 3. Market Segmentation Theory: Different investors supply capital for short- and long- term investments, so the term structure depends on different supply/demand equilibria

Which of the following items is specified in a futures contract?

1. the contract size 2. the acceptable grade of the commodity on which the contract is held 3. the settlement price

Which of the following items is not specified in a futures contract?

1. the maximum acceptable price range during the life of the contract 2. the market price at expiration

29. The present exchange rate is C$ = U. S. $0.78. The one year future rate is C$ = U. S. $0.76. The yield on a 1-year U. S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investor indifferent between investing in the U. S. bill and the Canadian bill.

1.04 = [($0.76/$0.78)(1 + r)] - 1; r = 6.7%.

28. Suppose the 1-year risk-free rate of return in the U. S. is 4% and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U. S. $1.65. A 1- year future exchange rate of __________ for the pound would make a U. S. investor indifferent between investing in the U. S. security and investing the British security.

1.04/1.07 = x/1.65; x = 1.6037. 1.6037

26. Suppose the 1-year risk-free rate of return in the U. S. is 5%. The current exchange rate is 1 pound = U. S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U. S. investor to invest in the British security?

1.05 = (1 + r) X [1.57/1.60] - 1; r = 7.0%.

27. The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U. S. $) that a U. S. investor can earn by investing in the Canadian security is __________.

1.08[0.76/0.78] = x - 1; x = 5.23%.

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

1.4% $1,000/(1.10)^10 = $385.54; $1,000/(1.11)^9 = $390.92; ($390.92 - $385.54)/$385.54 = 1.4%.

A firm has a P/E ratio of 12 and a ROE of 13% and a market to book value of _________.

1.56 E/P = ROE/(P/B); 1/12 = 0.13 P/B; 0.0833 = 0.13/(P/B); 0.0833(P/B) = 0.13; P/B = 1.56.

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the option has delta of .5, what is its elasticity?

1.79

An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25 basis points, how much change will there be in the bond's price?

1.83% ΔP/P = (-8.05 × 0.0025)/1.1 = 1.83%.

A 10%, 30-year corporate bond was recently being priced to yield 12%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be

10.09. D* = D/(1 + y); D* = 11.3/(1.12) = 10.09.

A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value. The yield to maturity on this bond is

10.15% N=9 PV=1000-66 PMT=90 FV=1000 I=10.15%

Which one of the following statements regarding "basis" is not true?

a short hedger suffers losses when the basis decreases

A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity of 12%. Intuitively and without using calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be

10.9%. In order to earn yield to maturity, the coupons must be reinvested at the yield to maturity. However, as the bond is selling at discount, the yield must be higher than the coupon rate. Therefore, B is the only possible answer.

Which one of the following statements regarding "basis" is not true?

a short hedger suffers losses when the basis decreases.

A long hedge is

a short position in the spot market with a simultaneous long position in the futures market.

A callable bond should be priced the same as

a straight bond plus a call option

A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%. The firm's ROE is ________.

11.18% ROE = (1 − 0.35)[14% + (14% − 10%)0.8] = 11.18%

You purchased an annual interest coupon bond one year ago with six years remaining to maturity at the time of purchase. The coupon interest rate is 10% and par value is $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been

11.95%. FV = 1000, PMT = 100, n = 6, i = 8, PV = 1092.46; FV = 1,000, PMT = 100, n = 5, i = 7, PV = 1,123.01; HPR = (1,123.01 - 1,092.46 + 100)/1,092.46 = 11.95%.

11.97 use put-call parity and solve for unknown. because we're not paying dividends, we use the first put-call parity relationship: C + X/(1 + r)^T = S0 - P 10 + 58/(1.055)^1 = 53 + P P = 11.97

Bond D is $1,000 par value zero-coupon. 4 years til maturity, priced at $635.52

12% ($1,000 - $635.52)/$635.52 = 0.573515; (1.573515)1/4 - 1.0 = 12%.

15.26 C = 103 - [100/(1.05)] + 7.50; C = $15.26.

[Show Calculation] Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index with delivery date after one year? a. $1,343.40 b. $62.00 c. $1,418.44 d. $1,524.25 e. None of these is correct

1500*[1+5.75%-(62/1500)]=1542.25 d. $1,524.25

A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market yield changes by 44 basis points, how much change will there be in the bond's price?

2.91% ΔP/P = (-7 × 0.0044)/1.06 = 2.91%

Over a period of thirty-odd years in managing investment funds, Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value. The average return from using this strategy was approximately _____.

20%

Two popular moving average periods are

200-day and 53 week.

E-Minis typically have a value of ____________ percent of the standard contract and exist for ____________.

20; stock indexes and foreign currencies

You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 9% at the time you sell.

23.8% $1,000/(1.11)7 = $481.66; $1,000/(1.09)6 = $596.27; ($596.27 - $481.66)/$481.66 = 23.8%

74. The following price quotations were taken from the Wall Street Journal. The premium on one February 90 call contract is

3 1/8 = $3.125 X 100 = $312.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

A firm has a (net profit/pretax profit ratio) of 0.625, a leverage ratio of 1.2, a (pretax profit/EBIT) of 0.9, an ROE of 17.82%, a current ratio of 8, and a return on sales ratio of 8%. The firm's asset turnover is ________.

3.3 17.82% = 0.625 × 0.9 × 8% × asset turnover × 1.2; asset turnover = 3.3.

A firm has an ROE of -2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is _______.

4% −2% = (1) [ROA + (ROA − 10%) 1] = 4%

What is the yield to maturity of a 2-year bond? 1-year forward rate of year 1: 4.6% 1-year forward rate of year 2: 4.9%

4.7% [(1.046)(1.049)]^1/2 - 1 = 4.7%

[Show Calculation] Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $45. If the risk-free rate is 4%, the stock price is $48, and the put sells for $1.50, what should be the price of the call? a. $4.38 b. $5.60 c. $6.23 d. $12.26 e. None of these is correct.

48+1.5 - (45/(1+.04)^1)=6.23 c. $6.23

Which one of the following is a correct statement concerning duration? 1. The higher the yield to maturity, the greater the duration. 2. The higher the coupon, the shorter the duration. 3. The difference in duration can be large between two bonds with different coupons each maturing in more than 15 years. 4. The duration is the same as term to maturity only in the case of zero-coupon bonds. 5. The higher the coupon, the shorter the duration; the difference in duration can be large between two bonds with different coupons each maturing in more than 15 years; and the duration is the same as term to maturity only in the case of zero-coupon bonds.

5 The relationship between ->duration and yield to maturity is an inverse one; as is the relationship between ->duration and coupon rate. The difference in the durations of longer-term bonds of varying coupons (high coupon vs. zero) is considerable. Duration equals term to maturity only with zeros.

The yield to maturity of a 20-year zero-coupon bond that is selling for $372.50 with a value at maturity of $1,000 is

5.1%. [$1,000/($372.50]^(1/20) - 1 = 5.1%

Consider a bond selling at par with modified duration of 22 years and convexity of 415. A 2% decrease in yield would cause the price to increase by 44%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule?

52.3% ∆P/P = -D × ∆y + (1/2) × Convexity × (∆y)^2; = -22 × -.02 + (1/2) × 415× (.02)^2 = .44 + .083 = .523 52.3%

A put option on Facebook (European style, with strike price of X = $60 and expiration in T = 6 months) is traded at P0 = $5. Facebook's stock price is currently S0 = $56. Facebook pays no dividends. Assume that risk free rate is rf = 0% per year. If you purchase the put, at what stock price ST will you break even (have zero P&L)?

You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position?

65 70 - 5 = 65 (think of the graph and where the profit line hits zero)

Holding other factors constant, which one of the following bonds has the smallest price volatility? 7-year, 0% coupon bond 7-year, 12% coupon bond 7 year, 14% coupon bond 7-year, 10% coupon bond

7 year, 14% coupon bond Duration (and thus price volatility) is lower when the coupon rates are higher.

[Show Calculation] You purchase one IBM 70 call option for a premium of $6. Ignoring transaction costs, the break-even price of the position is a. $98 b. $64 c. $76 d. $70 e. None of these is correct

70+6 c. $76

You purchased a call option for $3.45 17 days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return? If you do not exercise the call today and it expires, what will be your holding period return?

73.9%, -100% exercising: [(51-45) - 3.45]/3.45 = 73.9% not exercising (no payoff and suffer the loss): losing 3.45, which means a 100% loss

73.9%, -100% If the call is exercised the gross profit is $51 - 45 = $6. The net profit is $6 - 3.45 = $2.55. The holding period return is $2.55/$3.45 = .739 (73.9%). If the call is not exercised, there is no gross profit and the investor loses the full amount of the premium. The return is ($0 - 3.45)/$3.45 = -1.00 (-100%).

You purchased an annual interest coupon bond one year ago that had six years remaining to maturity at that time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been

8% FV = 1,000, PMT = 100, n = 6, i = 8, PV = 1,092.46; FV = 1000, PMT = 100, n = 5, i = 8, PV = 1,079.85; HPR = (1,079.85 - 1,092.46 + 100)/1,092.46 = 8%.

Given the yield on a 3-year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3?

8.5% f3 = (1.07)^3/[(1.06) (1.065)] - 1 = 8.5%

Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 0f1 = 6.1% in year 1 and 1f1 = 6.9% in year 2, what must be the forward rate 2f1 in year 3?

8.6% f3 = (1.072)^3/[(1.061) (1.069)] - 1 = 8.6%

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be

800 -$5 + (-$3) = -$8 × 100 = $800

A coupon bond that pays interest annually is selling at par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is

9% -When a bond sells at par value, the coupon rate is equal to the yield to maturity.

A coupon bond that pays interest of $40 semi-annually has a par value of $1,000, matures in four years, and is selling today at a $36 discount from par value. The yield to maturity on this bond is

9.09%. FV = 1,000, PMT = 40, n = 8, PV = -964, i = 9.09%.

A Eurodollar futures contract has a 7.5% rate. The listing for this contract would show a value of

92.5 100-7.5 = 92.5

A firm has a return on equity of 14% and a dividend-payout ratio of 60%. The firm's anticipated growth rate is A. 5.6%. B. 10%. C. 14%. D. 20%.

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $33.33 B. $0.27 C. $31.82 D. $56.25

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. a) long; increase b)long; decrease c) short; increase d)long; stay the same e) short; stay the same

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. A. long; increase B. long; decrease C. short; increase D. long; stay the same E. short; stay the same

An analyst has determined that the intrinsic value of IBM stock is $80 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 22, then it would be reasonable to assume the expected EPS of IBM in the coming year is A. $3.64. B. $4.44. C. $14.40. D. $22.50.

An investor believes that a bond may temporarily increase in credit risk. Which of the following would be the most liquid method of exploiting this? a. The purchase of a credit default swap. b. The sale of a credit default swap. c. The short sale of the bond.

An investor with a long position in Treasury notes futures will profit if A. interest rates decline. B. interest rates increase. C. the prices of Treasury notes decrease. D. the price of the S&P 500 Index increases. E. None of the options are correct.

Antiquated Products Corporation produces goods that are very mature in their product life cycles. Antiquated Products Corporation is expected to pay a dividend in year 1 of $1.00, a dividend of $0.90 in year 2, and a dividend of $0.85 in year 3. After year 3, dividends are expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth A. $8.98. B. $10.57. C. $20.00. D. $22.22.

Assume that Bolton Company will pay a $2.00 dividend per share next year, an increase from the current dividend of $1.50 per share that was just paid. After that, the dividend is expected to increase at a constant rate of 5%. If you require a 12% return on the stock, the value of the stock is A. $28.57. B. $28.79. C. $30.00. D. $31.78. E. None of the options are correct

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The projected free cash flow of F&G Manufacturing Company for the coming year is A. $250,000. B. $180,000. C. $300,000. D. $380,000

Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A A. will be greater 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. cannot be calculated without knowing the market rate of return.

Sales Company paid a $1.00 dividend per share last year and is expected to continue to pay out 40% of earnings as dividends for the foreseeable future. If the firm is expected to generate a 10% return on equity in the future, and if you require a 12% return on the stock, the value of the stock is A. $17.67. B. $13.00. C. $16.67. D. $18.67.

Suppose that the average P/E multiple in the oil industry is 22. Exxon is expected to have an EPS of $1.50 in the coming year. The intrinsic value of Exxon stock should be A. $33.00. B. $35.55. C. $63.00. D. $72.00. E. None of the options are correct.

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today? A. $20.60 B. $20.00 C. $12.12 D. $22.00

The buyer of a futures contract is said to have a __________ position, and the seller of a futures contract is said to have a __________ position in futures. A. long; short B. long; long C. short; short D. short; long E. margined; long

The expectations theory of the term structure of interest rates states that (a) forward rates are determined by investors' expectations of future interest rates. (b) forward rates exceed the expected future interest rates. (c) yields on long- and short-maturity bonds are determined by the supply and demand for the securities. (d) All of these are correct. (e) None of these is correct.

The most appropriate discount rate to use when applying a FCFE valuation model is the A. required rate of return on equity. B. WACC. C. risk-free rate. D. None of the options are correct

The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFE B. FCEF C. DDM D. FCEF or DDM E. P/E

To exploit an expected increase in interest rates, an investor would most likely A. sell Treasury bond futures. B. take a long position in wheat futures. C. buy S&P 500 Index futures. D. take a long position in Treasury bond futures. E. None of the options are correct.

WACC is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFF B. FCFE C. DDM D. FCFF or DDM, depending on the debt level of the firm, E. P/E

Which of the following most accurately describes the behavior of credit default swaps? a. When credit risk increases, swap premiums increase. b. When credit and interest risk rate increases, swap premiums increase. c. When credit risk increases, swap premiums increase, but when interest rate risk increases, swap premium decrease.

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return. A. $30.23 B. $24.11 C. $26.52 D. $27.50 E. None of the options are correct

Zero had a FCFE of $4.5M last year and has 2.25M shares outstanding. Zero's required return on equity is 10%, and WACC is 8.2%. If FCFE is expected to grow at 8% forever, the intrinsic value of Zero's shares is A. $108.00. B. $1080.00. C. $26.35. D. $14.76. E. None of the options are correct

_________ is equal to common shareholders'equity divided by common shares outstanding. A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q

firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that A. the stock experienced a drop in the P/E ratio. B. the firm had a decrease in dividend-payout ratio. C. the firm increased the number of shares outstanding. D. the required rate of return decreased.

Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt. Give two numerical examples that show the possible outcomes, one favorable and one unfavorable.

A firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt by swapping the $6 million per year in interest income for an amount tied to a short-term interest rate (i.e. to make an interest rate swap). This would provide the firm protection against interest rate risk in that if interest rates rise, so will the firm's income. The firm would then enter into a swap agreement with a swap dealer to make this conversion. For example, a firm could offer to pay 6% on the notional principal of $1M and receive payment of the LIBOR rate on that amount of notional principal. So, the firm would swap $6M payment for a payment of "LIBOR x $1M", whereby the LIBOR rate was 6%. The firm would pay an interest income of $6M and receive a LIBOR payment of $6M. This would, in effect, convert the original fixed-rate bond into a synthetic floating-rate portfolio.

A support level is the price range at which a technical analyst would expect the

Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to A) overconfidence B) framing C) regret avoidance D) sample neglect E) all of the above

A) overconfidence

The put/call ratio is computed as ____________, and higher values are considered ____________ signals. A. the number of outstanding put options divided by outstanding call options; bullish or bearish B. the number of outstanding put options divided by outstanding call options; bullish C. the number of outstanding put options divided by outstanding call options; bearish D. the number of outstanding call options divided by outstanding put options; bullish E. the number of outstanding call options divided by outstanding put options; bearish

A) the number of outstanding put options divided by outstanding call options; bullish or bearish

Use the two-state put option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is __________ the hedge ratio is __________. A. $0 and $40; -4/7 B. $0 and $50; +4/7 C. $0 and $40; +4/7 D. $0 and $50; -4/7 E. $20 and $40; +1/2

A. $0 and $40; -4/7

Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 cents per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 cents per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. 75. If the economy enters a recession, the total revenue of Firm C will be _______. A. $1,680,000B. $1,400,000C. $2,000,000D. $0E. None of these is correct.

A. $1,680,000 1,400,000(1.20) = $1,680,000

A preferred stock will pay a dividend of $3.00 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $33.33B. $0.27C. $31.82D. $56.25E. None of these is correct

A. $33.33 3/.09= 33.33

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy? A. $4,800 B. $200 C. $5,000 D. $5,200 E. None of these is correct

A. $4,800 -200 + 5,000 = 4,800

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy? A. $4,800 B. $200 C. $5,000 D. $5,200 E. None of the options.

A. $4,800 (50x100) - (2x100) = 4800

Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 cents per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 cents per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of Firm C will be _______. A. $420,000B. $750,000C. $510,000D. $204,000E. None of these is correct.

A. $420,000

You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position? A. $65 B. $75 C. $5 D. $70

A. $65 BEPput = strike price - premium paid. It's a PUT because you're WRITING or SELLING the option.

A. -$345 = −$225 + [−$300(0.4)] = −$345

A firm has a return on equity of 14% and a dividend payout ratio of 60%. The firm's anticipated growth rate is ________. A. 5.6%B. 10%C. 14%D. 20%E. None of these is correct

A. 5.6% 14% X 0.40 = 5.6%

_________ is equal to (common shareholders' equity/common shares outstanding).A. Book value per shareB. Liquidation value per shareC. Market value per shareD. Tobin's QE. None of these is correct

A. Book value per share

The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships.

A. CAPM, will be D. APT, will be

105. The required rate of return on equity is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFE B. FCEF C. DDM D. FCEF or DDM E. P/E

A. FCFE

103. WACC is the most appropriate discount rate to use when applying a ______ valuation model. A. FCFF B. FCFE C. DDM D. FCFF or DDM depending on the debt level of the firm E. P/E

A. FCFF

High P/E ratios tend to indicate that a company will ______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. None of these is correct

A. Grow Quickly

51. Which of the following are used by technical analysts to determine proper stock prices? I) trendlines II) earnings III) dividend prospects IV) expectations of future interest rates V) resistance levels A. I and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. I and II

A. I and V

The price that the writer of a put option receives to sell the option is called the A. premium B. exercise price C. execution price D. acquisition price E. strike price

A. Premium

Which one of the following stock index futures has a multiplier of $100 times the index value? A. Russell 2000 B. FTSE 100 C. S&P Mid-Cap D. DAX-30 E. Russell 2000 and S&P Mid-Cap

A. Russell 2000

Which two indices had the highest correlation between them during the 2008-2012 period? A. S&P and DJIA; the correlation was 0.979 B. S&P and Russell 2000; the correlation was 0.948 C. DJIA and Russell 2000; the correlation was 0.908 D. S&P and NASDAQ 100; the correlation was 0.928 E. NASDAQ 100 and DJIA; the correlation was 0.876

A. S&P and DJIA; the correlation was 0.979

The emerging stock market exhibiting the highest local currency return in 2009 was A. Thailand B. ChinaC. PolandD. MexicoE. Bolivia

A. Thailand

4. __________ a snapshot of the financial condition of the firm at a particular time. A. The balance sheet provides B. The income statement provides C. The statement of cash flows provides D. All of these provide E. None of these provides

A. The balance sheet provides

According to Michael Porter, there are five determinants of competition. An example of _____ is when new entrants to an industry put pressure on prices and profits. A. Threat of EntryB. Rivalry between Existing CompetitorsC. Pressure from Substitute ProductsD. Bargaining power of BuyersE. Bargaining power of Suppliers

A. Threat of Entry

A protective put strategy is __________. A. a long put plus a long position in the underlying asset B. a long put plus a long call on the same underlying asset C. a long call plus a short put on the same underlying asset D. a long put plus a short call on the same underlying asset E. None of the options.

A. a long put plus a long position in the underlying asset Protective puts involve being long a stock and purchasing put options for that stock with a strike price that is near the underlying stock's current price.

61. A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. None of the options

A. a long put plus a long position in the underlying asset.

A protective put strategy is A. a long put plus a long position in the underlying asset. B. a long put plus a long call on the same underlying asset. C. a long call plus a short put on the same underlying asset. D. a long put plus a short call on the same underlying asset. E. None of these is correct.

A. a long put plus a long position in the underlying asset.

A peak is _______. A. a transition from an expansion in the business cycle to the start of a contractionB. a transition from a contraction in the business cycle to the start of an expansionC. a depression that lasts more than three yearsD. only a feature of geography and not an investment termE. None of these is correct.

A. a transition from an expansion in the business cycle to the start of a contraction

An American call option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of these is correct.

A. any time on or before the expiration date

13. An American put option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of the options

A. any time on or before the expiration date.

14. An American call option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of the options

A. any time on or before the expiration date.

An American put option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of these is correct.

A. any time on or before the expiration date.

55. Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this suggests that A. bad news about Music Doctors was announced yesterday. B. good news about Music Doctors was announced yesterday. C. no news about Music Doctors was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

A. bad news about Music Doctors was announced yesterday.

A collar

A. combines interest rate caps and floors. B. entails the purchase of a cap with one limit rate and the sale of a floor with a lower limit rate.

The premise of behavioral finance is that A. conventional financial theory ignores how real people make decisions and that people make a difference. B. conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility maximizing investors. C. conventional financial theory should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. D. conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. E. None of the options

A. conventional financial theory ignores how real people make decisions and that people make a difference.

16. A common strategy for passive management is ____________. A. creating an index fund B. creating a small firm fund C. creating an investment club D. creating an index fund and creating an investment club E. creating a small firm fund and creating an investment club

A. creating an index fund

43. Lookback options have payoffs that A. depend in part on the minimum or maximum price of the underlying asset during the life of the option. B. only depend on the minimum price of the underlying asset during the life of the option. C. only depend on the maximum price of the underlying asset during the life of the option. D. are known in advance.

A. depend in part on the minimum or maximum price of the underlying asset during the life of the option.

Lookback options have payoffs that

A. depend in part on the minimum or maximum price of the underlying asset during the life of the option.

76. Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends. A. dividend payout ratio B. degree of financial leverage C. variability of earnings D. inflation rate E. None of these is correct

A. dividend payout ratio

Other things being equal, a low ________ would be most consistent with a relatively high growth rate of firm earnings and dividends. A. dividend payout ratioB. degree of financial leverageC. variability of earningsD. inflation rateE. None of these is correct

A. dividend payout ratio

The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange's stock to A. drop immediately. B. remain unchanged. C. increase immediately. D. gradually decline for the next several weeks. E. gradually increase for the next several weeks

A. drop immediately In an efficient market the price of the stock should drop immediately when the bad news is announced. If later news changes the perceived impact to Florida Orange, the price may once again adjust quickly to the new information. A gradual change is a violation of the EMH.

43. The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight, during the peak of the citrus harvest. In an efficient market one would expect the price of Florida Orange's stock to A. drop immediately. B. remain unchanged. C. increase immediately. D. gradually decline for the next several weeks. E. gradually increase for the next several weeks.

A. drop immediately.

Basu (1977, 1983) found that firms with low P/E ratios A. earned higher average returns than firms with high P/E ratios. B. earned the same average returns as firms with high P/E ratios. C. earned lower average returns than firms with high P/E ratios. D. had higher dividend yields than firms with high P/E ratios. E. none of the above.

A. earned higher average returns than firms with high P/E ratios. Firms with high P/E ratios already have an inflated price relative to earnings and thus tend to have lower returns than low P/E ratio stocks. However, the P/E ratio may capture risk not fully impounded in market betas so this may represent an appropriate risk adjustment rather than a market anomaly.

42. Fundamental analysis uses _________. A. earnings and dividends prospects B. relative strength C. price momentum D. earnings and dividends prospects, and relative strength E. earnings and dividends prospects, and price momentum

A. earnings and dividends prospects

DeBondt and Thaler believe that high P/E result from investors' A. earnings expectations that are too extreme. B. earnings expectations that are not extreme enough. C. stock price expectations that are too extreme. D. stock price expectations that are not extreme enough.

A. earnings expectations that are too extreme.

At expiration, the time value of an at-the-money put option is always __________. A. equal to zero B. equal to the stock price minus the exercise price C. negative D. positive

A. equal to zero

An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains, but may accept the same investment if it is posed in terms of risk surrounding potential losses. A. framing B. regret avoidance C. overconfidence D. conservatism

A. framing

A firm in an industry that is very sensitive to the business cycle will likely have a stock beta __________. A. greater than 1.0B. equal to 1.0C. less than 1.0 but greater than 0.0D. equal to or less than 0.0E. There is no relationship between beta and sensitivity to the business cycle.

A. greater than 1.0

2. High P/E ratios tend to indicate that a company will ______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. None of these is correct

A. grow quickly

If the economy is shrinking, firms with high operating leverage will experience _________. A. higher decreases in profits than firms with low operating leverageB. similar decreases in profits as firms with low operating leverageC. smaller decreases in profits than firms with low operating leverageD. no change in profitsE. None of these is correct.

A. higher decreases in profits than firms with low operating leverage

If the economy is growing, firms with high operating leverage will experience _________. A. higher increases in profits than firms with low operating leverageB. similar increases in profits as firms with low operating leverageC. smaller increases in profits than firms with low operating leverageD. no change in profitsE. None of these is correct.

A. higher increases in profits than firms with low operating leverage

Contango

A. holds that the natural hedgers are the purchasers of a commodity, not the suppliers. B. is a hypothesis polar to backwardation.

If interest rates decrease, business investment expenditures are likely to ______ and consumer durable expenditures are likely to ________. A. increase, increaseB. increase, decreaseC. decrease, increaseD. decrease, decreaseE. be unaffected, be unaffected

A. increase, increase

Increases in the money supply will cause demand for investment and consumption goods to _______ in the short run and cause prices to _______ in the long run. A. increase, increaseB. increase, decreaseC. decrease, increaseD. decrease, hold steadyE. be unaffected, be unaffected

A. increase, increase

2. When Maurice Kendall examined the patterns of stock returns in 1953 he concluded that the stock market was __________. Now, these random price movements are believed to be _________. A. inefficient; the effect of a well-functioning market B. efficient; the effect of an inefficient market C. inefficient; the effect of an inefficient market D. efficient; the effect of a well-functioning market E. irrational; even more irrational than before

A. inefficient; the effect of a well-functioning market Random price changes were originally thought to be driven by irrationality. Now, financial economists believe random price changes occur because markets are informationally efficient.

28. An investor with a long position in Treasury notes futures will profit if A. interest rates decline. B. interest rate increase. C. the prices of Treasury notes increase. D. the price of the long bond increases. E. None of these is correct.

A. interest rates decline.

72. Rubinstein (1994) observed that the performance of the Black-Scholes model had deteriorated in recent years, and he attributed this to

A. investor fears of another market crash.

The current market price of a share of Boeing stock is $75. If a put option on this stock has a strike price of $70, the put A. is out of the money. B. is in the money. C. sells for a higher price than if the market price of Boeing stock is $70. D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70. E. is in the money and sells for a higher price than if the market price of Boeing stock is $70.

A. is out of the money

The current market price of a share of CSCO stock is $22. If a put option on this stock has a strike price of $20, the put A. is out of the money. B. is in the money. C. sells for a higher price than if the strike price of the put option was $25. D. is out of the money and sells for a higher price than if the strike price of the put option was $25. E. is in the money and sells for a higher price than if the strike price of the put option was $25.

A. is out of the money

The current market price of a share of a stock is $20. If a put option on this stock has a strike price of $18, the put A. is out of the money. B. is in the money. C. sells for a higher price than if the strike price of the put option was $23. D. is out of the money and sells for a higher price than if the strike price of the put option was $23. E. is in the money and sells for a higher price than if the strike price of the put option was $23.

A. is out of the money

The expectations hypothesis of futures pricing

A. is the simplest theory of futures pricing. B. states that the futures price equals the expected value of the future spot price of the asset.

The stock price index and new orders for nondefense capital goods are A. leading economic indicators.B. coincidental economic indicators.C. lagging economic indicators.D. not useful as economic indicators.E. None of these is correct.

A. leading economic indicators.

8. A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. A. long; increase B. long; decrease C. short; increase D. long; stay the same E. short; stay the same

A. long; increase

The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures. A. long; short B. long; long C. short; short D. short; long E. margined; long

A. long; short

Normal backwardation

A. maintains that for most commodities, there are natural hedgers who desire to shed risk. B. maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.

27. Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices) than 29 1⁄2 year bonds with a nearly identical duration. A hedge fund that sells 29 1⁄2 year bonds and buys 30 year bonds is taking a ______.

A. market neutral position

Investors can ______ invest in an industry with the highest expected return by purchasing _____. A. most easily; industry-specific iSharesB. not; industry-specific iSharesC. most easily; industry-specific ADRsD. not; individual stocksE. None of these is correct.

A. most easily; industry-specific iShares

Commodity futures pricing

A. must be related to spot prices. B. includes cost of carry. C. converges to spot prices at maturity.

Trading in stock index futures

A. now exceeds buying and selling of shares in most markets. B. reduces transactions costs as compared to trading in stocks. C. increases leverage as compared to trading in stocks. D. generally results in faster execution than trading in stocks

A swap

A. obligates two counterparties to exchange cash flows at one or more future dates. B. allow participants to restructure their balance sheets. C. allows a firm to convert outstanding fixed rate debt to floating rate debt.

84. Common size financial statements make it easier to compare firms ___________. A. of different sizes B. in different industries C. with different degree of leverage D. that use different inventory valuation methods (FIFO vs. LIFO) E. None of these is correct.

A. of different sizes

29. On November 22, 2009 the stock price of WalMart was $39.50 and the retailer stock index was 600.30. On November 25, 2009 the stock price of WalMart was $40.25 and the retailer stock index was 605.20. Consider the ratio of WalMart to the retailer index on November 22 and November 25. WalMart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock. A. outperforming, buying B. outperforming, selling C. underperforming, buying D. underperforming, selling E. equally performing, neither buying nor selling

A. outperforming, buying

On November 22, 2005 the stock price of Walmart was $39.50 and the retailer stock index was 600.30. On November 25, 2005 the stock price of Walmart was $40.25 and the retailer stock index was 605.20. Consider the ratio of Walmart to the retailer index on November 22 and November 25. Walmart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock. A. outperforming, buying B. outperforming, selling C. underperforming, buying D. underperforming, selling E. equally performing, neither buying nor selling

A. outperforming, buying 11/22: $39.50/600.30 = 0.0658; 11/25: $40.25/605.20 = 0.0665; Thus, K-Mart's relative strength is improving and technicians using this technique would recommend buying.

An interest rate floor

A. pays the holder in any period that the reference interest rate falls below some limit. B. Is analogous to a sequence of options with the same strike and different maturities. C. is part of a collar.

The process of marking-to-market

A. posts gains or losses to each account daily. B. may result in margin calls.

4. The price that the writer of a put option receives to sell the option is called the A. premium. B. exercise price. C. execution price. D. acquisition price. E. strike price.

A. premium.

Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is A. regret avoidance. B. framing. C. mental accounting. D. overconfidence. E. obnoxicity.

A. regret avoidance.

102. The most appropriate discount rate to use when applying a FCFE valuation model is the __________. A. required rate of return on equity B. WACC C. risk-free rate D. required rate of return on equity or risk-free rate depending on the debt level of the firm E. None of these is correct

A. required rate of return on equity

27. To exploit an expected increase in interest rates, an investor would most likely A. sell Treasury bond futures. B. take a long position in wheat futures. C. buy S&P 500 index futures. D. take a long position in Treasury bond futures. E. None of these is correct.

A. sell Treasury bond futures.

1. If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. hard

A. semistrong

If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. hard

A. semistrong

A. semistrong The semistrong form of EMH maintains that stock prices immediately reflect all historical and current public information, but not inside information.

A declining GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales. A. stagnant; littleB. stagnant; ampleC. expanding; littleD. expanding; ampleE. stable; no

A. stagnant; little

49. Chartists practice A. technical analysis. B. fundamental analysis. C. regression analysis. D. insider analysis. E. psychoanalysis.

A. technical analysis.

An example of a highly cyclical industry is _______. A. the automobile industryB. the tobacco industryC. the food industryD. the automobile industry and the tobacco industryE. the tobacco industry and the food industry

A. the automobile industry

The delta of an option is __________. A. the change in the dollar value of an option for a dollar change in the price of the underlying asset B. the change in the dollar value of the underlying asset for a dollar change in the call price C. the percentage change in the value of an option for a one percent change in the value of the underlying asset D. the percentage change in the value of the underlying asset for a one percent change in the value of the call

A. the change in the dollar value of an option for a dollar change in the price of the underlying asset

25. Delta is defined as

A. the change in the value of an option for a dollar change in the price of the underlying asset.

The percentage change in the stock call option price divided by the percentage change in the stock price is called __________. A. the elasticity of the option B. the delta of the option C. the theta of the option D. the gamma of the option

A. the elasticity of the option

28. A put option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

30. A call option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

A call option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

17. To adjust for stock splits A. the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor. B. the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor. C. the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor. D. the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor.

A. the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.

Currency options and currency futures options have different values because A. the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity B. the payoff on the currency option depends on the exchange rate futures price at maturity, while the currency futures option's payoff depends on the exchange rate at maturity C. currency options are American while currency futures options are European D. currency futures options are American while currency options are European E. currency options are quoted in U.S. dollars while currency futures options are quoted in the foreign currency

A. the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity Because exchange rates and exchange rate futures prices generally are not equal, the payoffs may be quite different.

If prices are correct, __________, and if prices are not correct, __________. A. there are no easy profit opportunities; there are no easy profit opportunities B. there are no easy profit opportunities; there are easy profit opportunities C. there are easy profit opportunities; there are easy profit opportunities D. there are easy profit opportunities; there are no easy profit opportunities

A. there are no easy profit opportunities; there are no easy profit opportunities

86. The goal of fundamental analysts is to find securities A. whose intrinsic value exceeds market price. B. with a positive present value of growth opportunities. C. with high market capitalization rates. D. All of these are correct. E. None of these is correct.

A. whose intrinsic value exceeds market price.

The goal of fundamental analysts is to find securities A. whose intrinsic value exceeds market price.B. with a positive present value of growth opportunities.C. with high market capitalization rates.D. All of these are correct.E. None of these is correct.

A. whose intrinsic value exceeds market price.

16. Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A ____. A. will be greater 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. cannot be calculated without knowing the market rate of return E. None of these is correct.

A. will be greater than the intrinsic value of stock B

Each of two stocks, A and B, are expected to pay a dividend of $5 in the upcoming year. The expected growth rate of dividends is 10% for both stocks. You require a rate of return of 11% on stock A and a return of 20% on stock B. The intrinsic value of stock A ____. A. will be greater than the intrinsic value of stock BB. will be the same as the intrinsic value of stock BC. will be less than the intrinsic value of stock BD. cannot be calculated without knowing the market rate of returnE. None of these is correct.

A. will be greater than the intrinsic value of stock B

Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming year. The expected growth rate of dividends is 9% for both stocks. You require a rate of return of 10% on stock C and a return of 13% on stock D. The intrinsic value of stock C ____. A. will be greater than the intrinsic value of stock DB. will be the same as the intrinsic value of stock DC. will be less than the intrinsic value of stock DD. cannot be calculated without knowing the market rate of returnE. None of these is correct.

A. will be greater than the intrinsic value of stock D

22. Refer to the financial statements of Black Barn Company. The firm's average collection period for 2009 is ____.

AR Turnover = $8,000,000/[($1,200,000 + $950,000)/2] = 7.44; ACP = 365/7.44 = 49.05 days.

Interest rate futures contracts are actively traded on the

All of these are correct.

Metals and energy currency futures contracts are actively traded on

All of these are correct.

Trading in stock index futures

All of these are correct.

All of these indices have actively traded futures contracts

Researchers have found that most of the small firm effect occurs A. during the spring months. B. during the summer months. C. in December. D. in January. E. randomly.

Answer: D Difficulty: Moderate Rationale: Much of the so-called small firm effect simply may be the tax-effect as investors sell stocks on which they have losses in December and reinvest the funds in January. As small firms are especially volatile, these actions affect small firms in a more dramatic fashion.

88. In an increasingly globalized investment environment, comparability problems become even greater. Discuss some of the problems for the investor who wishes to have an internationally diversified portfolio.

Answer: Firms in other countries are not required to prepare financial statement according to U. S. generally accepted accounting principles. Accounting practices in other countries vary from those of the U. S. In some countries, accounting standards may be very lax or virtually nonexistent. Some of the major differences are: reserve practices, many countries allow more discretion in setting aside reserves for future contingencies than is typical in the U. S.; depreciation practices, in the U. S., firms often use accelerated depreciation for tax purposes, and straight line depreciation for accounting purposes, while most other countries do not allow such dual accounts, and finally, the treatment of intangibles varies considerably across countries. Finally, the problem of obtaining financial information may be considerable for some international investments, varying currency exchange rates present additional complications, translation of statements into English is another complication; potential government expropriation of assets and political unrest may be problems in some countries. In general, for the individual investor, investing in global or international mutual funds is a less risky way to add diversification to the portfolio than is attempting to value individual international securities.

As an approximation, subtract the present value of the dividend from the stock price and recompute the Black-Scholes value with this adjusted stock price. Since the stock price is lower, the option value will be lower.

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has A. an anticipated earnings growth rate which is less than that of the average firm. B. a dividend yield which is less than that of the average firm. C. less predictable earnings growth than that of the average firm. D. greater cyclicality of earnings growth than that of the average firm

A futures contract a) is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. b)is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. c) gives the buyer the right, but not the obligation, to buy an asset some time in the future. d)is a contract to be signed in the future by the buyer and the seller of the commodity. e) None of these is correct.

A futures contract A. is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. C. gives the buyer the right, but not the obligation, to buy an asset sometime in the future. D. is a contract to be signed in the future by the buyer and the seller of the commodity. E. None of the options are correct. A futures contract locks in the price of a commodity to be delivered at some future date. Both the buyer and seller of the contract are committed.

A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.275 B. $27.50 C. $31.82 D. $56.25

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future. A. long; decrease B. short; decrease C. short; stay the same D. short; increase E. long; stay the same

A version of earnings management that became common in the 1990s was A. when management made changes in the operations of the firm to ensure that earnings did not increase or decrease too rapidly. B. reported "pro forma earnings." 18-47 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. C. when management made changes in the operations of the firm to ensure that earnings did not increase too rapidly. D. when management made changes in the operations of the firm to ensure that earnings did not decrease too rapidly.

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market-capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is A. $150,000. B. $180,000. C. $300,000. D. $380,000.

Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining Company has a beta of 0.25. The return you should require on the stock is A. 2%. B. 4%. C. 6%. D. 8%.

Highpoint had a FCFE of $246M last year and has 123M shares outstanding. Highpoint's required return on equity is 10%, and WACC is 9%. If FCFE is expected to grow at 8.0% forever, the intrinsic value of Highpoint's shares is A. $21.60. B. $108. C. $244.42. D. $216.00.

Historically, P/E ratios have tended to be A. higher when inflation has been high. B. lower when inflation has been high. C. uncorrelated with inflation rates but correlated with other macroeconomic variables. D. uncorrelated with any macroeconomic variables, including inflation rates

If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A. V0 = (Expected dividend yield in year 1)/k. B. V0 = (Expected EPS in year 1)/k. C. V0 = (Treasury bond yield in year 1)/k. D. V0 = (Market return in year 1)/k.

Investors want high plowback ratios A. for all firms. B. whenever ROE > k. C. whenever k > ROE. D. only when they are in low tax brackets. E. whenever bank interest rates are high

Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity. a) make delivery; take delivery b)take delivery; make delivery c) take delivery; take delivery d)make delivery; make delivery e) negotiate the price; pay the price

Mature Products Corporation produces goods that are very mature in their product life cycles. Mature Products Corporation is expected to pay a dividend in year 1 of $2.00, a dividend of $1.50 in year 2, and a dividend of $1.00 in year 3. After year 3, dividends are expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth A. $9.00. B. $10.57. C. $20.00. D. $22.22.

Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of 0.25. The intrinsic value of the stock is A. $80.00. B. $133.33. C. $200.00. D. $400.00

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the market-capitalization rate for Risk Metrics? A. 13.6% B. 13.9% C. 15.6% D. 16.9% E. None of the options are correct.

See Candy had a FCFE of $6.1M last year and has 2.32M shares outstanding. See's required return on equity is 10.6%, and WACC is 9.3%. If FCFE is expected to grow at 6.5% forever, the intrinsic value of See's shares is A. $108.00. B. $68.30. C. $26.35. D. $14.76

Siri had a FCFE of $1.6M last year and has 3.2M shares outstanding. Siri's required return on equity is 12%, and WACC is 9.8%. If FCFE is expected to grow at 9% forever, the intrinsic value of Siri's shares is A. $68.13. B. $18.17. C. $26.35. D. $14.76. E. None of the options are correct.

Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be A. $28.12. B. $93.50. C. $63.00. D. $72.00. E. None of the options are correct.

The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend-payout ratio B. intrinsic value C. market-capitalization rate D. plowback ratio

The growth in dividends of XYZ, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in dividends is expected to be 2% per year, indefinitely. The required rate of return on XYZ, Inc. is 12%. Last year's dividends per share were $2.00. What should the stock sell for today? A. $8.99 B. $25.21 C. $40.00 D. $110.00 E. None of the options are correct

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. None of the options are correct.

The term structure of interest rates is: (a) The relationship between the rates of interest on all securities. (b) The relationship between the interest rate on a security and its time to maturity. (c) The relationship between the yield on a bond and its default rate. (d) All of these are correct. (e) None of these is correct.

Which one of the following statements is true? A. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. B. If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call. C. A margin deposit can only be met with cash. D. All futures contracts require the same margin deposit. E. The maintenance margin is set by the producer of the underlying asset.

Xlink Company has an expected ROE of 15%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings. A. 3.75% B. 11.25% C. 8.25% D. 15.0%

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return. A. $23.91 B. $14.96 C. $26.52 D. $27.50 E. None of the options are correct.

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the 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

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Specialists

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return. A. $23.91B. $14.96C. $26.52D. $27.50E. None of these is correct

B. $14.96 .12 = (16 − P + 0.75)/P .12P = 16 − P + 0.75 1.12P = 16.75 P = 14.96.

A preferred stock will pay a dividend of $2.75 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.275B. $27.50C. $31.82D. $56.25E. None of these is correct

B. $27.50 2.75/.10=27.50

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is __________. A. $200 B. $300 C. zero D. $500

B. $300 -$5 + $2 = -$3 × 100 = -$300 Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

Consider the following: rf US -- .04/year rf Australia -- .03/year Spot exchange rate -- 1.67y A$/$ What should be the proper futures price for a 1-year contract? A. 1.703 A$/$ B. 1.654 A$/$ C. 1.638 A$/$ D. 1.778 A$/$ E. 1.686 A$/$

B. 1.654 A$/$ $1.67(1.03/1.04) = $1.654/A$/$

Xlink Company has an expected ROE of 15%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings. A. 3.75%B. 11.25%C. 8.25%D. 15.0%E. None of these is correct

B. 11.25% 15%*0.75=11.25%

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. 62. What is the market capitalization rate for Risk Metrics? A. 13.6%B. 13.9%C. 15.6%D. 16.9%E. None of these is correct

B. 13.9% k = 3.50/90 + .10; k = 13.9%

13. The minimum investment in some new hedge funds is as low as $______, compared to a traditional minimum of $______.

B. 25,000; 250,000 to 1 million

B. 5.6% 14%*0.40=5.6%

12. _________ above which it is difficult for the market to rise. A. A book value is a value B. A resistance level is a value C. A support level is a value D. A book value and a resistance level are values E. A book value and a support level are values

B. A resistance level is a value

Consider the following: rf US -- .04/year rf Australia -- .03/year Spot exchange rate -- 1.6y A$/$ If the futures market price is 1.63 A$/$, how could you arbitrage? A. Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price. B. Borrow U.S. dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price. C. Borrow U.S. dollars in the United States and invest them in the U.S. and enter futures positions to purchase Australian dollars at the current futures price. D. Borrow Australian dollars in Australia and invest them there, then convert back to U.S. dollars at the spot price. E. There is no arbitrage opportunity.

B. Borrow U.S. dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price.

Which one of the following stock index futures has a multiplier of $10 times the index value? A. Russell 2000 B. Dow Jones Industrial Average C. Nikkei D. DAX-30 E. NASDAQ 100

B. Dow Jones Industrial Average

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.A. Credit analystsB. Fundamental analystsC. Systems analystsD. Technical analystsE. Specialists

B. Fundamental Analysts

4. ________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Specialists

B. Fundamental analysts

14. Which one of the following statements is true? A. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. B. If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call. C. A margin deposit can only be met with cash. D. All futures contracts require the same margin deposit. E. The maintenance margin is set by the producer of the underlying asset.

B. If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call.

The _______ is defined as the present value of all cash proceeds to the investor in the stock.A. dividend payout ratioB. intrinsic valueC. market capitalization rateD. plowback ratioE. None of these is correct

B. Intrinsic Value

8. If you wish to compute economic earnings and are trying to decide how to account for inventory, ______. A. FIFO is better than LIFO B. LIFO is better than FIFO C. FIFO and LIFO are equally good D. FIFO and LIFO are equally bad E. None of these is correct.

B. LIFO is better than FIFO

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.A. Book value per shareB. Liquidation value per shareC. Market value per shareD. Tobin's QE. None of these is correct

B. Liquidation Value Per Share

94. Which of the following is the best measure of the floor for a stock price? A. Book value B. Liquidation value C. Replacement cost D. Market value E. Tobin's Q

B. Liquidation value

6. _______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the 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 E. None of these is correct

B. Liquidation value per share

11. Which one of the following statements regarding delivery is true? A. Most futures contracts result in actual delivery. B. Only one to three percent of futures contracts result in actual delivery. C. Only fifteen percent of futures contracts result in actual delivery. D. Approximately fifty percent of futures contracts result in actual delivery. E. Futures contracts never result in actual delivery

B. Only one to three percent of futures contracts result in actual delivery.

____________ may be responsible for the prevalence of active versus passive investments management. A. Forecasting errors B. Overconfidence C. Mental accounting D. Conservatism E. Regret avoidance

B. Overconfidence

Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases, and portfolio B if it decreases. E. Portfolio B if the stock price increases, and portfolio A if it decreases.

B. Portfolio A

_________ above which it is difficult for the market to rise. A. Book value is a value B. Resistance level is a value C. Support level is a value D. A and B E. A and C

B. Resistance level is a value When stock prices have remained stable for a long period, these prices are termed resistance levels; technicians believe it is difficult for the stock prices to penetrate these resistance levels.

According to Michael Porter, there are five determinants of competition. An example of _____ is when competitors seek to expand their share of the market. A. Threat of EntryB. Rivalry between Existing CompetitorsC. Pressure from Substitute ProductsD. Bargaining power of BuyersE. Bargaining power of Suppliers

B. Rivalry between Existing Competitors

9. __________ of the profitability of the firm over a period of time such as a year. A. The balance sheet is a summary B. The income statement is a summary C. That statement of cash flows is a summary D. The audit report is a summary E. None of these is a summary

B. The income statement is a summary

If you're the buyer of a put or call, your max loss is equal to _____________________. A. double the total amount B. the premium paid C. 50% of the total D. None of these

B. The premium paid

Which of the following are examples of interest rate futures contracts?

B. Treasury bonds. C. Eurodollars.

104. The most appropriate discount rate to use when applying a FCFF valuation model is the __________. A. required rate of return on equity B. WACC C. risk-free rate D. required rate of return on equity or risk-free rate depending on the debt level of the firm E. None of these is correct

B. WACC

75. A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has ________. A. an anticipated earnings growth rate which is less than that of the average firm B. a dividend yield which is less than that of the average firm C. less predictable earnings growth than that of the average firm D. greater cyclicality of earnings growth than that of the average firm E. None of these is correct.

B. a dividend yield which is less than that of the average firm

A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index most likely has ________. A. an anticipated earnings growth rate which is less than that of the average firmB. a dividend yield which is less than that of the average firmC. less predictable earnings growth than that of the average firmD. greater cyclicality of earnings growth than that of the average firmE. None of these is correct.

B. a dividend yield which is less than that of the average firm

81. You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called A. a short straddle. B. a long straddle. C. a horizontal straddle. D. a covered call. E. None of the options

B. a long straddle.

A trough is _______. A. a transition from an expansion in the business cycle to the start of a contractionB. a transition from a contraction in the business cycle to the start of an expansionC. a depression that lasts more than three yearsD. only something used by farmers to feed pigs and not an investment termE. None of these is correct.

B. a transition from a contraction in the business cycle to the start of an expansion

50. One problem with comparing financial ratios prepared by different reporting agencies is A. some agencies receive financial information later than others. B. agencies vary in their policies as to what is included in specific calculations. C. some agencies are careless in their reporting. D. some firms are more conservative in their accounting practices. E. None of these is correct.

B. agencies vary in their policies as to what is included in specific calculations.

Conventional theories presume that investors ____________ and behavioral finance presumes that they ____________. A. are irrational; are irrational B. are rational; may not be rational C. are rational; are rational D. may not be rational; may not be rational E. may not be rational; are rational

B. are rational; may not be rational

Hedge ratios for long calls are always __________. A. between -1 and 0 B. between 0 and 1 C. 1 D. greater than 1

B. between 0 and 1

Hedging one commodity by using a futures contract on another commodity is called __________. A. surrogate hedging B. cross hedging C. alternative hedging D. correlative hedging E. proxy hedging

B. cross hedging

Arbitrage proofs in futures market pricing relationships __________. A. rely on the CAPM B. demonstrate how investors can exploit misalignments C. incorporate transactions costs D. All of the options. E. None of the options.

B. demonstrate how investors can exploit misalignments

Studies of stock price reactions to news are called A. reaction studies. B. event studies. C. drift studies. D. both A and D are true. E. both B and D are true.

B. event studies Studies of stock price reactions to news are called event studies.

All else equal, call option values are higher __________. A. in the month of May B. for low dividend payout policies C. for high dividend payout policies D. in the month of May and for low dividend payout policies E. in the month of May and for high dividend payout policies

B. for low dividend payout policies Cash dividends affect option prices through their effect on the underlying stock price. Because the stock price is expected to drop by the amount of the dividend on the ex-dividend date, high cash dividends imply lower call premiums and higher put premiums. Conversely, low dividends imply higher call premiums and lower put premiums.

19. All else equal, call option values are higher A. in the month of May. B. for low dividend payout policies. C. for high dividend payout policies. D. in the month of May and for low dividend payout policies. E. in the month of May and for high dividend payout policies.

B. for low dividend payout policies.

54. Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that A. bad news about Google was announced yesterday. B. good news about Google was announced yesterday. C. no news about Google was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Google was announced yesterday.

Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that A. bad news about Matthews was announced yesterday. B. good news about Matthews was announced yesterday. C. no news about Matthews was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Matthews was announced yesterday AR = 17% - (5% + 1.2 (8%)) = +2.4%. A positive abnormal return suggests that there was firm-specific good news.

44. Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that A. bad news about Matthews was announced yesterday. B. good news about Matthews was announced yesterday. C. no news about Matthews was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

B. good news about Matthews was announced yesterday.

35. During periods of inflation, the use of FIFO (rather than LIFO) as the method of accounting for inventories causes _______. A. higher reported sales B. higher incomes taxes C. lower ending inventory D. higher incomes taxes and lower ending inventory E. None of these is correct.

B. higher incomes taxes

93. Trading in "exotic options" takes place primarily A. on the New York Stock Exchange. B. in the over-the-counter market. C. on the American Stock Exchange. D. in the primary marketplace. E. None of the options

B. in the over-the-counter market.

5. The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback ratio E. None of these is correct

B. intrinsic value

A futures contract A. is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. C. gives the buyer the right, but not the obligation, to buy an asset some time in the future. D. is a contract to be signed in the future by the buyer and the seller of the commodity. E. None of these is correct.

B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.

25. Credit risk in the swap market

B. is limited to the difference between the values of the fixed rate and floating rate obligations.

8. Historically, P/E ratios have tended to be ________. A. higher when inflation has been high B. lower when inflation has been high C. uncorrelated with inflation rates but correlated with other macroeconomic variables D. uncorrelated with any macroeconomic variables including inflation rates E. None of these is correct

B. lower when inflation has been high

If the economy were going into a recession, an attractive industry to invest in would be the ________ industry. A. automobileB. medical servicesC. constructionD. automobile and constructionE. medical services and construction

B. medical services

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price. A. positively; positively B. negatively; positively C. negatively; negatively D. positively; negatively E. not; not

B. negatively; positively

A European call option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid. E. None of these is correct.

B. only on the expiration date

15. A European call option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

B. only on the expiration date.

16. A European put option can be exercised A. any time in the future. B. only on the expiration date. C. if the price of the underlying asset declines below the exercise price. D. immediately after dividends are paid.

B. only on the expiration date.

5. Forecasting errors are potentially important because A. research suggests that people underweight recent information. B. research suggests that people overweight recent information. C. research suggests that people correctly weight recent information. D. research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. E. None of the options

B. research suggests that people overweight recent information.

34. A measure of asset utilization is _______. A. sales divided by working capital B. return on total assets C. return on equity capital D. operating profit divided by sales E. None of these is correct.

B. return on total assets

11. An American put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price increase. D. sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. E. buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

B. sell the underlying asset at the striking price on or before the expiration date.

An American put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price increase. D. sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase. E. buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

B. sell the underlying asset at the striking price on or before the expiration date.

9. A trader who has a __________ position in gold futures wants the price of gold to __________ in the future. A. long; decrease B. short; decrease C. short; stay the same D. short; increase E. long; stay the same

B. short; decrease

106. FCF and DDM valuations should be ____________ if the assumptions used are consistent. A. very different for all firms B. similar for all firms C. similar only for unlevered firms D. similar only for levered firms E. None of these is correct

B. similar for all firms

If the currency of your country is depreciating, the result should be to ______ exports and to _______ imports. A. stimulate, stimulateB. stimulate, discourageC. discourage, stimulateD. discourage, discourageE. not affect, not affect

B. stimulate, discourage

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders. A. semistrong B. strong C. weak D. semistrong, strong, and weak E. None of these are correct.

B. strong

B. strong The strong form includes all public and private information

6. Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity. A. make delivery; take delivery B. take delivery; make delivery C. take delivery; take delivery D. make delivery; make delivery E. negotiate the price; pay the price

B. take delivery; make delivery

66. Before expiration, the time value of a call option is equal to

B. the actual call price minus the intrinsic value of the call.

66. Before expiration, the time value of a call option is equal to A. zero. B. the actual call price minus the intrinsic value of the call. C. the intrinsic value of the call. D. the actual call price plus the intrinsic value of the call.

B. the actual call price minus the intrinsic value of the call.

Before expiration, the time value of a call option is equal to A. zero. B. the actual call price minus the intrinsic value of the call. C. the intrinsic value of the call. D. the actual call price plus the intrinsic value of the call. E. None of these is correct.

B. the actual call price minus the intrinsic value of the call.

60. According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to:

B. the call value plus the present value of the exercise price minus the stock price.

A call option on a stock is said to be in the money if __________. A. the exercise price is higher than the stock price B. the exercise price is less than the stock price C. the exercise price is equal to the stock price D. the price of the put is higher than the price of the call E. the price of the call is higher than the price of the put

B. the exercise price is less than the stock price In the money (ITM) means that a call option's strike price is below the market price of the underlying asset, or that the strike price of a put option is above the market price of the underlying asset.

27. A put option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price.

31. A call option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price.

A call option on a stock is said to be in the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

B. the exercise price is less than the stock price.

The potential loss for a writer of a naked call option on a stock is A. limited B. unlimited C. larger the lower the stock price D. equal to the call premium E. None of the options

B. unlimited If the buyer of the option elects to exercise the option and buy the stock at the exercise price, the seller of the option must go into the open market and buy the stock (in order to sell the stock to the buyer of the contract) at the current market price. Theoretically, the market price of a stock is unlimited; thus the writer's potential loss is unlimited.

50. The potential loss for a writer of a naked call option on a stock is

B. unlimited.

50. The potential loss for a writer of a naked call option on a stock is A. limited. B. unlimited. C. larger the lower the stock price. D. equal to the call premium. E. None of the options

B. unlimited.

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is ______.

Before-tax cash flow from operation $500,000 -Depreciation $100,000 Taxable income $400,000 -Taxes (30%) $120,000 After-tax unleveraged income $280,000 After-tax unlevered income + dep. $380,000 -New investment $200,000 Free cash flow $180,000 $180,000

If the market futures price is 1.69 A$/$, how could you arbitrage?

Borrow Australian Dollars in Australia, convert them to dollars, lend the proceeds in the United States and enter futures positions to purchase Australian Dollars at the current futures price.

If the futures market price is 1.63 A$/$, how could you arbitrage?

Borrow U. S dollars in the United States, convert them to Australian Dollars, lend the proceeds in Australia and enter futures positions to sell Australian Dollars at the current futures price.

Which of the following statements regarding delivery is most false?

Both most futures contracts result in actual delivery and only fifteen percent of futures contracts result in actual delivery

A firm has a return on equity of 20% and a dividend-payout ratio of 30%. The firm's anticipated growth rate is A. 6%. B. 10%. C. 14%. D. 20%.

According to the expectations hypothesis, an upward sloping yield curve implies that (a) Interest rates are expected to remain stable in the future. (b) Interest rates are expected to decline in the future. (c) Interest rates are expected to increase in the future. (d) Interest rates are expected to decline first, then increase. (e) Interest rates are expected to increase first, then decrease.

Forward rates ____________ future short rates because ____________. (a) are equal to; they are both extracted from yields to maturity. (b) are equal to; they are perfect forecasts. (c) differ from; they are imperfect forecasts. (d) differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity. (e) are equal to; although they are estimated from different sources they both are used by traders to make purchase decisions.

GAAP allows A. no leeway to manage earnings. B. minimal leeway to manage earnings. C. considerable leeway to manage earnings. D. earnings management if it is beneficial in increasing stock price. E. None of the options are correct

Goodie Corporation produces goods that are very mature in their product life cycles. Goodie Corporation is expected to have per share FCFE in year 1 of $2.00, per share FCFE of $1.50 in year 2, and per share FCFE of $1.00 in year 3. After year 3, per share FCFE is expected to decline at a rate of 1% per year. An appropriate required rate of return for the stock is 10%. The stock should be worth __________ today. A. $9.00 B. $101.57 C. $10.57 D. $22.22 E. $47.23

High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be A. $1.00. B. $2.50. C. $2.69. D. $2.81. E. None of the options are correct.

Holding other factors constant, which one of the following bonds has the smallest price volatility? a) 5 year, 0% coupon bond b) 5 year, 12% coupon bond c) 5 year, 14% coupon bond d) 5 year, 10 % coupon bond

If a firm has a required rate of return equal to the ROE, A. the firm can increase market price and P/E by retaining more earnings. B. the firm can increase market price and P/E by increasing the growth rate. C. the amount of earnings retained by the firm does not affect market price or the P/E. D. the firm can increase market price and P/E by retaining more earnings and increasing the growth rate. E. None of the options are correct.

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is a) the offsetting short trader. b)the corn farmer. c) the clearinghouse. d)the broker. e) the commodities dealer.

In a futures contract, the futures price is A. determined by the buyer and the seller when the delivery of the commodity takes place. B. determined by the futures exchange. C. determined by the buyer and the seller when they initiate the contract. D. determined independently by the provider of the underlying asset. E. None of the options are correct.

In the dividend discount model, which of the following are not incorporated into the discount rate? A. Real risk-free rate B. Risk premium for stocks C. Return on assets D. Expected inflation rate

JCPenney Company is expected to pay a dividend in year 1 of $1.65, a dividend in year 2 of $1.97, and a dividend in year 3 of $2.54. After year 3, dividends are expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today. A. $33.00 B. $40.67 C. $71.80 D. $66.00 E. None of the options are correct.

Lamm Corporation is expected have EBIT of $6.2M this year. Lamm Corporation is in the 40% tax bracket, will report $1.2M in depreciation, will make $1.4M in capital expenditures, and will have a $160,000 increase in net working capital this year. What is Lamm's FCFF? A. 6,200,000 18-56 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. B. 6,160,000 C. 3,360,000 D. 3,680,000 E. 4,625,000

Light Construction Machinery Company has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends. A. 3.0% B. 4.8% C. 8.25% D. 9.0%

Low P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. P/E ratios are unrelated to growth. E. None of the options are correct

Midwest Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of 3.00. The return you should require on the stock is A. 10%. B. 18%. C. 30%. D. 42%.

Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be A. $28.12. B. $35.55. C. $60.00. D. $72.00. E. None of the options are correct.

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. The market's required rate of return on Sure's stock is A. 14.0%. B. 17.5%. C. 16.5%. D. 15.25%. E. None of the options are correct

The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. What should the stock sell for today? A. $8.99 B. $25.21 C. $39.71 D. $110.00 E. None of the options are correct.

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. a) are; are b)are not; are c) are; are not d)are not; are not e) are; may or may not be

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are a) specified by the buyers and sellers. b)specified only by the buyers. c) specified by the futures exchanges. d)specified by brokers and dealers. e) None of these is correct.

The terms of futures contracts, such as the quality and quantity of the commodity and the delivery date, are A. specified by the buyers and sellers. B. specified only by the buyers. C. specified by the futures exchanges. D. specified by brokers and dealers. E. None of the options are correct

Which of the following is not proposed as an explanation for the term structure of interest rates? (a) The expectations theory. (b) The liquidity preference theory. (c) Modern portfolio theory. (d) Both the expectations theory and the liquidity preference theory.

Which of the following policy responses to unsustainable debt can have an immediate effect on reducing public debt service burden? (a) Carrying out structural reform on pension system (b) Cutting spending (c) Reducing the effective interest rate by renegotiating the terms and conditions of the outstanding debt with the holders. (d) Raising taxes

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return. A. $23.91 B. $24.11 C. $26.52 D. $27.50 E. None of the options are correct.

You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must A. buy one May corn futures contract. B. buy two April corn futures contract. C. sell one April corn futures contract. D. sell one May corn futures contract.

You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected to pay a dividend of $3 in the upcoming year while stock D is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock C A. will be greater than the intrinsic value of stock D. B. will be the same as the intrinsic value of stock D. C. will be less than the intrinsic value of stock D. D. will be the same or greater than the intrinsic value of stock D. E. None of the options.

You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A A. will be greater 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. will be the same or greater than the intrinsic value of stock B. E. None of the options are correct.

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X A. will be greater than the intrinsic value of stock Y. B. will be the same as the intrinsic value of stock Y. C. will be less than the intrinsic value of stock Y. D. will be the same or greater than the intrinsic value of stock Y. E. None of the options are correct.

You purchased one S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred: A) a loss of $1,500 B) a gain of $1,500 C) a loss of $750 D) a gain of $750 E) None of the above

C) a loss of $750 (-$950 + $947) X 250 = - $750

27. The anomalies literature A. provides a conclusive rejection of market efficiency. B. provides conclusive support of market efficiency. C. suggests that several strategies would have provided superior returns. D. provides a conclusive rejection of market efficiency and suggests that several strategies would have provided superior returns. E. None of the options

C) suggests that several strategies would have provided superior returns

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today? A. $20.00 B. $22.00 C. $12.12 D. $20.60

C. $12.12 D1/k K= .04+1.25(.14-.04)=.165 (22+2)/1.1650

A preferred stock will pay a dividend of $3.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.39B. $0.56C. $31.82D. $56.25E. None of these is correct

C. $31.82 3.50/.11=31.82

The following price quotations were taken from the Wall Street Journal. Stock Price- 91 7/8 " " Strike prices- 85 90 95 February- 7 3/8 4 1/8 5/8 The premium on one IBM February 90 call contract is A. $4.1250 B. $418.00 C. $412.50 D. $158.00 E. None of these is correct

C. $412.50 4 1/8 = $4.125 X 100 = $412.50

Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 cents per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 cents per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the before tax profit of Firm C will be _______. A. $1,680,000B. $1,170,000C. $510,000D. $204,000E. None of these is correct.

C. $510,000

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call? A. $8 B. $12 C. $6 D. $4 E. Cannot be determined without more information

C. $6 TM = 14 - (50-42) TM = 14 - 8 TM = 6

Suppose that the average P/E multiple in the oil industry is 20. Dominion Oil is expected to have an EPS of $3.00 in the coming year. The intrinsic value of Dominion Oil stock should be ____. A. $28.12B. $35.55C. $60.00D. $72.00E. None of these is correct

C. $60.00 20*3=60

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be __________. A. $500 B. $300 C. $800 D. $200 E. None of the options.

C. $800 (5+3) x 100 = 800 Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

You purchase one IBM March 200 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy? A. $20,000 B. $20,600 C. $19,400 D. $19,000 E. None of these is correct

C. 19,400 -600 + 20,000 = 19,400

C. 8.25% 11%*0.75=8.25%

13. _________ below which it is difficult for the market to fall. A. An intrinsic value is a value B. A resistance level is a value C. A support level is a value D. An intrinsic value and a resistance level are values E. A resistance level and a support level are values

C. A support level is a value

____________ is a measure of the extent to which a movement in the market index is reflected in the price movements of all stocks in the market. A. Put-call ratio B. Trin ratio C. Breadth D. Confidence index E. All of the options

C. Breadth

Which of the following are investment superstars who have consistently shown superior performance? I) Warren Buffet II) Phoebe Buffet III) Peter Lynch IV) Merrill Lynch V) Jimmy Buffet A. I, III, and IV B. II, III, and IV C. I and III D. III and IV E. I, III, IV, and V

C. I and III Warren Buffet manages Berkshire Hathaway and Peter Lynch managed Fidelity's Magellan Fund. Phoebe Buffet is a character on NBC's "Friends" and Jimmy Buffet is "Wasting Away in Margaritaville". Merrill Lynch isn't a person.

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. A. I only B. I and II C. II and III D. III and I E. All of the above

C. II and III

Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $104. B. decreases to $90. C. increases to $106. D. decreases to $96. E. None of these is correct.

C. Increases to $106 100 + 5 = 105 (breakeven) must be over 105 to make profit

74. In the dividend discount model, which of the following are not incorporated into the discount rate? A. Real risk-free rate B. Risk premium for stocks C. Return on assets D. Expected inflation rate E. None of these is correct

C. Return on assets

In the dividend discount model, which of the following are not incorporated into the discount rate? A. Real risk-free rateB. Risk premium for stocksC. Return on assetsD. Expected inflation rateE. None of these is correct

C. Return on assets

If you know that a call option will be profitably exercised then the Black-Scholes model price will simplify to _______. A. S0 - X B. X - S0 C. S0 - PV(X) D. PV(X) - S0

C. S0 - PV(X)

76. Which of the financial statements recognizes only transactions in which cash changes hands? A. Balance Sheet B. Income Statement C. Statement of Cash Flows D. Balance Sheet, and Income Statement E. Balance Sheet, Income Statement, and Statement of Cash Flows

C. Statement of Cash Flows

_________ below which it is difficult for the market to fall. A. Intrinsic value is a value B. Resistance level is a value C. Support level is a value D. A and B E. B and C

C. Support level is a value When stock prices have remained stable for a long period, these prices are termed support levels; technicians believe it is difficult for the stock prices to penetrate these support levels.

100. What happens to an option if the underlying stock has a 2-for-1 split?

C. The exercise price would become half of what it was and the number of options held would double.

100. What happens to an option if the underlying stock has a 2-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become one-half of what it was and the number of options held would double. D. The exercise price would double and the number of options held would double. E. There is no standard rule—each corporation has its own policy.

C. The exercise price would become one-half of what it was and the number of options held would double.

101. What happens to an option if the underlying stock has a 3-for-1 split? A. There is no change in either the exercise price or in the number of options held. B. The exercise price will adjust through normal market movements; the number of options will remain the same. C. The exercise price would become one-third of what it was and the number of options held would triple. D. The exercise price would triple and the number of options held would triple. E. There is no standard rule—each corporation has its own policy.

C. The exercise price would become one-third of what it was and the number of options held would triple.

5. __________ of the cash flow generated by the firm's operations, investments and financial activities. A. The balance sheet is a report B. The income statement is a report C. The statement of cash flows is a report D. The auditor's statement of financial condition is a report E. None of these is a report

C. The statement of cash flows is a report

You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value of stock C ____. A. will be greater than the intrinsic value of stock DB. will be the same as the intrinsic value of stock DC. will be less than the intrinsic value of stock DD. will be greater than the intrinsic value of stock D or will be the same as the intrinsic value of stock DE. None of these is correct.

C. Will be less than the intrinsic value of stock D

64. You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as .

C. a money spread

You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as __________. A. a long straddle B. a horizontal spread C. a money spread D. a short straddle E. None of the options.

C. a money spread A "money spread" involves the purchase of one option and the simultaneous sale of another with a different exercise price. Whereas a "time spread" refers to the sale and purchase of options with differing expiration date.

64. You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as A. a long straddle. B. a horizontal spread. C. a money spread. D. a short straddle. E. None of the options

C. a money spread.

7. Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. buying individual stocks on margin and trading frequently and investing in hedge funds E. investing in hedge funds and a passive investment strategy

C. a passive investment strategy.

Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. buying individual stocks on margin and trading frequently and investing in hedge funds E. investing in hedge funds and a passive investment strategy

C. a passive investment strategy.

Proponents of the EMH typically advocate A. buying individual stocks on margin and trading frequently. B. investing in hedge funds. C. a passive investment strategy. D. A and B E. B and C

C. a passive investment strategy. Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.

91. A callable bond should be priced the same as

C. a straight bond plus a call option.

91. A callable bond should be priced the same as A. a convertible bond. B. a straight bond plus a put option. C. a straight bond plus a call option. D. a straight bond plus warrants. E. a straight bond.

C. a straight bond plus a call option.

65. You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as

C. a time spread.

65. You purchased one AT&T March 50 put and sold one AT&T April 50 put. Your strategy is known as A. a vertical spread. B. a straddle. C. a time spread. D. a collar.

C. a time spread.

56. Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits.

C. are not; are

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A. are; are not B. are; are C. are not; are D. are not; are not E. are always; are sometimes

C. are not; are

30. An increase in the basis will __________ a long hedger and __________ a short hedger. A. hurt; benefit B. hurt; hurt C. benefit; hurt D. benefit; benefit E. benefit; have no effect upon

C. benefit; hurt

If you believe in the reversal effect, you should A. buy bonds in this period if you held stocks in the last period. B. buy stocks in this period if you held bonds in the last period. C. buy stocks this period that performed poorly last period. D. go short. E. C and D

C. buy stocks this period that performed poorly last period The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa.

101. GAAP allows A. no leeway to manage earnings. B. minimal leeway to manage earnings. C. considerable leeway to manage earnings. D. earnings management if it is beneficial in increasing stock price. E. None of these is correct.

C. considerable leeway to manage earnings.

35. A support level is the price range at which a technical analyst would expect the A. supply of a stock to increase dramatically. B. supply of a stock to decrease substantially. C. demand for a stock to increase substantially. D. demand for a stock to decrease substantially. E. price of a stock to fall.

C. demand for a stock to increase substantially.

29. Markets would be inefficient if irrational investors __________ and actions of arbitragers were __________. A. existed; unlimited B. did not exist; unlimited C. existed; limited D. did not exist; limited

C. existed; limited

18. All else equal, call option values are lower A. in the month of May. B. for low dividend payout policies. C. for high dividend payout policies. D. in the month of May and for low dividend payout policies. E. in the month of May and for high dividend payout policies.

C. for high dividend payout policies.

93. Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities. A. technical analysts B. statistical analysts C. fundamental analysts D. dividend analysts E. psychoanalysts

C. fundamental analysts

Two basic assumptions of technical analysis are that security prices adjust A. rapidly to new information and market prices are determined by the interaction of supply and demand. B. rapidly to new information and liquidity is provided by security dealers. C. gradually to new information and market prices are determined by the interaction of supply and demand. D. gradually to new information and liquidity is provided by security dealers. E. rapidly to information and to the actions of insiders.

C. gradually to new information and market prices are deTechnicians follow market data--price changes and volume of trading (as indicator of supply and demand) believing that they can identify price trends as security prices adjust gradually.termined by the interaction of supply and demand.

38. Two basic assumptions of technical analysis are that security prices adjust A. rapidly to new information and market prices are determined by the interaction of supply and demand. B. rapidly to new information and liquidity is provided by security dealers. C. gradually to new information and market prices are determined by the interaction of supply and demand. D. gradually to new information and liquidity is provided by security dealers. E. rapidly to information and to the actions of insiders.

C. gradually to new information and market prices are determined by the interaction of supply and demand.

98. Low P/E ratios tend to indicate that a company will ______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. P/E ratios are unrelated to growth E. None of these is correct

C. grow slowly

Low P/E ratios tend to indicate that a company will ______, ceteris paribus. A. grow quicklyB. grow at the same speed as the average companyC. grow slowlyD. P/E ratios are unrelated to growthE. None of these is correct

C. grow slowly

87. The dividend discount model A. ignores capital gains. B. incorporates the after-tax value of capital gains. C. includes capital gains implicitly. D. restricts capital gains to a minimum. E. None of these is correct.

C. includes capital gains implicitly.

Jaffe (1974) found that stock prices _________ after insiders intensively bought shares. A. decreased B. did not change C. increased D. became extremely volatile E. became much less volatile

C. increased Insider trading may signal private information.

Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $504. B. decreases to $490. C. increases to $506. D. decreases to $496. E. None of the options

C. increases to $506 $500 + $5 = $505 (breakeven). The price of the stock must increase to above $505 for the option holder to earn a profit

C. increases to $506. 500 + 5 = 505 (break even) the price must go over this to show profit

If the stock price decreases, the price of a put option on that stock __________ and that of a call option __________. A. decreases; increases B. decreases; decreases C. increases; decreases D. increases; increases E. does not change; does not change

C. increases; decreases

Assume that the Federal Reserve decreases the money supply. This action will cause ________ to decrease. A. interest ratesB. the unemployment rateC. investment in the economyD. trade balanceE. None of these is correct.

C. investment in the economy

45. Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests that A. the market is not efficient. B. Nicholas' stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the earnings increase to be larger than what was actually announced.

57. QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of -1.7% yesterday. This suggests that A. the market is not efficient. B. QQAG stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the earnings increase to be larger than what was actually announced.

Nicholas Manufacturing just announced yesterday that its 4th quarter earnings will be 10% higher than last year's 4th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests that A. the market is not efficient. B. Nicholas' stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the earnings increase to be larger than what was actually announced. Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.

59. Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of -2% yesterday. This suggests that A. the market is not efficient. B. Music Doctors stock will probably rise in value tomorrow. C. investors expected the sales increase to be larger than what was actually announced. D. investors expected the sales increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

C. investors expected the sales increase to be larger than what was actually announced.

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call __________. A. is out of the money B. is in the money C. is at the money D. None of the options.

C. is at the money Options are at the money when the exercise price and asset price are equal.

The current market price of a share of IBM stock is $195. If a call option on this stock has a strike price of $195, the call __________. A. is out of the money B. is in the money C. is at the money D. None of the options.

C. is at the money Options are at the money when the exercise price and asset price are equal.

Sector rotation A. should always be carried out.B. is never worthwhile.C. is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.D. can be implemented costlessly.E. None of these is correct.

C. is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.

The average duration of unemployment and changes in the consumer price index for services are _________. A. leading economic indicatorsB. coincidental economic indicatorsC. lagging economic indicatorsD. composite economic indicatorsE. None of these is correct.

C. lagging economic indicators

Fama and French (1992) found that the stocks of firms within the highest decile of market/book ratios had average monthly returns of _______ while the stocks of firms within the lowest decile of market/book ratios had average monthly returns of ________. A. greater than 1%, greater than 1% B. greater than 1%, less than 1% C. less than 1%, greater than 1% D. less than 1%, less than 1% E. less than 0.5%, greater than 0.5%

C. less than 1%, greater than 1% This finding suggests either that low market-to-book ratio firms are relatively underpriced, or that the market-to-book ratio is serving as a proxy for a risk factor that affects expected equilibrium returns.

9. The ______ 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 rate E. None of these is correct

C. market capitalization rate

The elasticity of a stock put option is always __________. A. positive B. smaller than one C. negative D. infinite

C. negative

56. QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that A. bad news about QQAG was announced yesterday. B. good news about QQAG was announced yesterday. C. no significant news about QQAG was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

C. no significant news about QQAG was announced yesterday.

QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that A. bad news about QQAG was announced yesterday. B. good news about QQAG was announced yesterday. C. no significant news about QQAG was announced yesterday. D. interest rates rose yesterday. E. interest rates fell yesterday.

C. no significant news about QQAG was announced yesterday. AR = 20% - (3% + 1.7 (10%)) = 0.0%. A positive abnormal return suggests that there was firm-specific good news and a negative abnormal return suggests that there was firm-specific bad news

The most widely used monetary tool is __________. A. altering the discount rateB. altering the reserve requirementsC. open market operationsD. altering marginal tax ratesE. None of these is correct.

C. open market operations

Single men trade far more often than women. This is due to greater ________ among men. A. framing B. regret avoidance C. overconfidence D. conservatism

C. overconfidence

7. Since 1955, Treasury bond yields and earnings yields on stocks were _______. A. identical B. negatively correlated C. positively correlated D. uncorrelated

C. positively correlated

29. To hedge a long position in Treasury bonds, an investor most likely would A. buy interest rate futures. B. sell S&P futures. C. sell interest rate futures. D. buy Treasury bonds in the spot market. E. None of these is correct.

C. sell interest rate futures.

If you believe in the reversal effect, you should A. sell bonds in this period if you held stocks in the last period. B. sell stocks in this period if you held bonds in the last period. C. sell stocks this period that performed well last period. D. go long. E. C and D

C. sell stocks this period that performed well last period. The reversal effect states that stocks that do well in one period tend to perform poorly in the subsequent period, and vice versa.

If the economy is shrinking, firms with low operating leverage will experience _________. A. higher decreases in profits than firms with high operating leverageB. similar decreases in profits as firms with high operating leverageC. smaller decreases in profits than firms with high operating leverageD. no change in profitsE. None of these is correct.

C. smaller decreases in profits than firms with high operating leverage

If the economy is growing, firms with low operating leverage will experience _________. A. higher increases in profits than firms with high operating leverageB. similar increases in profits as firms with high operating leverageC. smaller increases in profits than firms with high operating leverageD. no change in profitsE. None of these is correct.

C. smaller increases in profits than firms with high operating leverage

7. The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are A. specified by the buyers and sellers. B. specified only by the buyers. C. specified by the futures exchanges. D. specified by brokers and dealers. E. None of these is correct.

C. specified by the futures exchanges

Prior to expiration __________. A. the intrinsic value of a put option is greater than its actual value B. the intrinsic value of a put option is always positive C. the actual value of a put option is greater than the intrinsic value D. the intrinsic value of a put option is always greater than its time value

C. the actual value of a put option is greater than the intrinsic value

84. If a firm has a required rate of return equal to the ROE A. the firm can increase market price and P/E by retaining more earnings. B. the firm can increase market price and P/E by increasing the growth rate. C. the amount of earnings retained by the firm does not affect market price or the P/E. D. the firm can increase market price and P/E by retaining more earnings and the firm can increase market price and P/E by increasing the growth rate. E. None of these is correct.

C. the amount of earnings retained by the firm does not affect market price or the P/E.

Monetary policy in the U.S. is determined by A. government budget decisions.B. presidential mandates.C. the board of Governors of the Federal Reserve System.D. congressional actions.E. None of these is correct.

C. the board of Governors of the Federal Reserve System.

47. The maximum loss a buyer of a stock call option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the call premium. D. the stock price. E. None of the options

C. the call premium.

The maximum loss a buyer of a stock call option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the call premium. D. the stock price. E. None of the options

C. the call premium.

29. A put option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

A call option on a stock is said to be at the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

C. the exercise price is equal to the stock price.

39. One of the problems with attempting to forecast stock market values is that A. there are no variables that seem to predict market return. B. the earnings multiplier approach can only be used at the firm level. C. the level of uncertainty surrounding the forecast will always be quite high. D. dividend payout ratios are highly variable. E. None of these is correct.

C. the level of uncertainty surrounding the forecast will always be quite high.

48. The maximum loss a buyer of a stock put option can suffer is equal to

C. the put premium.

48. The maximum loss a buyer of a stock put option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the put premium. D. the stock price. E. None of the options

C. the put premium.

The maximum loss a buyer of a stock put option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the put premium. D. the stock price. E. None of the options

C. the put premium.

In the equation Profits = a + b Ã- ($/â‚¤ exchange rate), b is a measure of __________. A. the firm's beta when measured in terms of the foreign currency B. the ratio of the firm's beta in terms of dollars to the firm's beta in terms of pounds C. the sensitivity of profits to the exchange rate D. the sensitivity of the exchange rate to profits E. the frequency with which the exchange rate changes

C. the sensitivity of profits to the exchange rate

69. The value of a stock put option is positively related to the following factors except A. the time to expiration. B. the striking price. C. the stock price. D. All of the options E. None of the options

C. the stock price.

The value of a stock put option is positively related to the following factors except A. the time to expiration. B. the striking price. C. the stock price. D. All of these are correct. E. None of these is correct.

C. the stock price.

Industrial production refers to ________. A. the amount of personal disposable income in the economyB. the difference between government spending and government revenuesC. the total manufacturing output in the economyD. the total production of goods and services in the economyE. None of these is correct.

C. the total manufacturing output in the economy

Asian options differ from American and European options in that __________. A. they are only sold in Asian financial markets B. they never expire C. their payoff is based on the average price of the underlying asset D. they are only sold in Asian financial markets and they never expire E. they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset

C. their payoff is based on the average price of the underlying asset A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time; whereas an American may be exercised at any time before the expiration date. That said, Asian options differ from both in that its payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time.

92. Asian options differ from American and European options in that A. they are only sold in Asian financial markets. B. they never expire. C. their payoff is based on the average price of the underlying asset. D. they are only sold in Asian financial markets and they never expire. E. they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset.

C. their payoff is based on the average price of the underlying asset.

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. time value

If you believe in the _______ form of the EMH, you believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume or short interest. A. semistrong B. strong C. weak D. all of the above E. none of the above

C. weak The information described above is market data, which is the data set for the weak form of market efficiency. The semistrong form includes the above plus all other public information. The strong form includes all public and private information.

14. You wish to earn a return of 12% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A ____. A. will be greater 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. will be greater than the intrinsic value of stock B or will be the same as the intrinsic value of stock B E. None of these is correct.

C. will be less than the intrinsic value of stock B

12. You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X _____. A. will be greater than the intrinsic value of stock Y B. will be the same as the intrinsic value of stock Y C. will be less than the intrinsic value of stock Y D. will be greater than the intrinsic value of stock Y or will be the same as the intrinsic value of stock Y E. None of these is correct.

C. will be less than the intrinsic value of stock Y

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X _____. A. will be greater than the intrinsic value of stock YB. will be the same as the intrinsic value of stock YC. will be less than the intrinsic value of stock YD. will be greater than the intrinsic value of stock Y or will be the same as the intrinsic value of stock YE. None of these is correct.

C. will be less than the intrinsic value of stock Y

The intrinsic value of an out-of-the-money put option is equal to __________. A. the stock price minus the exercise price B. the put premium C. zero D. the exercise price minus the stock price

C. zero

In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be A. positive and large. B. positive and small. C. zero. D. negative and small. E. negative and large.

C. zero In an efficient market there should be no serial correlation between returns from non-overlapping periods.

42. In an efficient market the correlation coefficient between stock returns for two non-overlapping time periods should be A. positive and large. B. positive and small. C. zero. D. negative and small. E. negative and large.

C. zero.

The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships.

CAPM and APT; will be

Ceteris Paribus, the duration of a bond is negatively correlated with the bond's

Coupon rate and YTM

Describe covered call and straddle option strategies (i.e., which positions compose each portfolio).

Covered call: Buy one unit of stock, sell one unit of call (with X > S) Straddle: Buy one unit of call, buy one unit of put of equal strike

3. Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange. A. are not; are B. are; are C. are not; are not D. are; are not E. are; may or may not be

A European put option allows the holder to a) buy the underlying asset at the striking price on or before the expiration date. b)sell the underlying asset at the striking price on or before the expiration date. c) potentially benefit from a stock price increase. d)sell the underlying asset at the striking price on the expiration date. e) potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be A. $1.80. B. $2.12. C. $1.77. D. $1.94.

A preferred stock will pay a dividend of $6.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.60 B. $6.00 C. $600 D. $60.00 E. None of the options are correct

According to Peter Lynch, a rough rule of thumb for security analysis is that A. the growth rate should be equal to the plowback rate. B. the growth rate should be equal to the dividend-payout rate. C. the growth rate should be low for emerging industries. D. the growth rate should be equal to the P/E ratio. E. None of the options are correct.

An analyst has determined that the intrinsic value of Dell stock is $34 per share using the capitalized earnings model. If the typical P/E ratio in the computer industry is 27, then it would be reasonable to assume the expected EPS of Dell in the coming year will be A. $3.63. B. $4.44. C. $14.40. D. $1.26.

Boaters World is expected to have per share FCFE in year 1 of $1.65, per share FCFE in year 2 of $1.97, and per share FCFE in year 3 of $2.54. After year 3, per share FCFE is expected to grow at the rate of 8% per year. An appropriate required return for the stock is 11%. The stock should be worth _______ today. A. $77.53 B. $40.67 C. $82.16 D. $71.80 E. None of the options are correct.

Commodity futures pricing a) must be related to spot prices. b)includes cost of carry. c) converges to spot prices at maturity. d)All of these are correct. e) None of these is correct.

Consider the free cash flow approach to stock valuation. F&G Manufacturing Company is expected to have before-tax cash flow from operations of $750,000 in the coming year. The firm's corporate tax rate is 40%. It is expected that $250,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $125,000. After the coming year, cash flows are expected to grow at 7% per year. The appropriate market capitalization rate for unleveraged cash flow is 13% per year. The firm has no outstanding debt. The total value of the equity of F&G Manufacturing Company should be A. $1,615,156.50. B. $2,479,168.95. C. $3,333,333.33. D. $4,166,666.67

Earnings management is A. when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. B. when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. C. when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. D. the practice of using flexible accounting rules to improve the apparent profitability of the firm.

Foreign currency futures contracts are actively traded on the A. euro. B. British pound. C. drachma. D. euro and British pound. E. All of the options are correct.

If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan. A. higher; higher B. lower; lower C. lower; higher D. higher; lower E. It is not possible to tell.

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by a) buying all the stocks in the S&P 500 and selling put options on the S&P 500 index. b)selling short all the stocks in the S&P 500 and buying S&P Index futures. c) selling all the stocks in the S&P 500 and buying call options on the S&P 500 index. d)selling S&P 500 Index futures and buying all the stocks in the S&P 500. e) None of these is correct.

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be A. $22.73. B. $27.50. C. $28.57. D. $38.46.

Medtronic Company has an expected ROE of 16%. The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends. A. 3.0% B. 6.0% C. 7.2% D. 4.8%

Rome Corporation is expected have EBIT of $2.3M this year. Rome Corporation is in the 30% tax bracket, will report $175,000 in depreciation, will make $175,000 in capital expenditures, and will have no change in net working capital this year. What is Rome's FCFF? A. 2,300,000 B. 1,785,000 C. 1,960,000 D. 1,610,000 E. 1,435,000

SGA Consulting had a FCFE of $3.2M last year and has 3.2M shares outstanding. SGA's required return on equity is 13%, and WACC is 11.5%. If FCFE is expected to grow at 8.5% forever, the intrinsic value of SGA's shares is A. $21.60. B. $26.56. C. $244.42. D. $24.11.

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is A. $10.71. B. $15.00. C. $17.75. D. $25.00.

Suppose that the average P/E multiple in the oil industry is 16. Shell Oil is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Shell Oil stock should be A. $28.12. B. $35.55. C. $63.00. D. $72.00. E. None of the options are correct.

The growth in dividends of ABC, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell for today? A. $8.99 B. $25.21 C. $40.00 D. $27.74 E. None of the options are correct

The growth in per share FCFE of CBS, Inc. is expected to be 10% per year for the next two years, followed by a growth rate of 5% per year for three years. After this five-year period, the growth in per share FCFE is expected to be 2% per year, indefinitely. The required rate of return on CBS, Inc. is 12%. Last year's per share FCFE was $2.00. What should the stock sell for today? A. $8.99 B. $22.51 C. $40.00 D. $25.21 E. $27.12

The growth in per share FCFE of FOX, Inc. is expected to be 15% per year for the next three years, followed by a growth rate of 8% per year for two years. After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely. The required rate of return on FOX, Inc. is 13%. Last year's per share FCFE was $1.85. What should the stock sell for today? A. $28.99 B. $24.47 C. $26.84 D. $27.74 E. $19.18

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 75%, the P/E ratio will be A. 7.69. B. 8.33. C. 9.09. D. 11.11. E. None of the options are correct.

The most popular approach to forecasting the overall stock market is to use A. the dividend multiplier. B. the aggregate return on assets. C. the historical ratio of book value to market value. D. the aggregate earnings multiplier. E. Tobin's Q.

The open interest on silver futures at a particular time is the A. number of silver futures contracts traded during the day. B. number of outstanding silver futures contracts for delivery within the next month. C. number of silver futures contracts traded the previous day. D. number of all long or short silver futures contracts outstanding.

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the intrinsic value of Torque's stock? A. $14.29 B. $14.60 C. $12.33 D. $11.62

Which of the following is true about profits from futures contracts? a) The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made. b)It is possible for both the holder of the long position and the holder of the short position to earn a profit. c) The clearinghouse makes most of the profit. d)The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

D. $1.26 $34(1/27)

63. Refer to the financial statements for Snapit Company. The firm's current ratio for 2009 is __________. A. 1.98 B. 2.47 C. 0.65 D. 1.53 E. None of these is correct.

D. 1.53

Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the intrinsic value of Torque's stock? A. $14.29B. $14.60C. $12.33D. $11.62E. None of these is correct

D. 11.62 k = 5% + 1.2(13% − 5%) = 14.6% P = 1/(.146 − .06) = $11.62.

Two popular moving average periods are A. 90-day and 52 week. B. 180-day and three year. C. 180-day two year. D. 200-day and 53 week. E. 200-day and two year.

D. 200-day and 53 week.

D. 4.8% 16%*0.30=4.8%

Cumulative abnormal returns (CAR) A. are used in event studies. B. are better measures of security returns due to firm-specific events than are abnormal returns (AR). C. are cumulated over the period prior to the firm-specific event. D. A and B. E. A and C.

D. A and B. As leakage of information occurs, the accumulated abnormal returns that are abnormal returns summed over the period of interest (around the event date) are better measures of the effect of firm-specific events

According to Michael Porter, there are five determinants of competition. An example of _____ is when a buyer purchases a large fraction of an industry's output and can demand price concessions. A. Threat of EntryB. Rivalry between Existing CompetitorsC. Pressure from Substitute ProductsD. Bargaining power of BuyersE. Bargaining power of Suppliers

D. Bargaining power of Buyers

________ bias means that investors are too slow in updating their beliefs in response to evidence. A. Framing B. Regret avoidance C. Overconfidence D. Conservatism E. None of the options

D. Conservatism

11. __________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. Credit analysts, Fundamental analysts, Systems analysts, and Technical analysts

D. Technical analysts

. __________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability. A. Credit analysts B. Fundamental analysts C. Systems analysts D. Technical analysts E. All of the above

D. Technical analysts Technicians attempt to predict future stock prices based on historical stock prices.

Which of the following is(are) example(s) of interest rate futures contracts? A. Corporate bonds B. Treasury bonds C. Eurodollars D. Treasury bonds and Eurodollars E. Corporate bonds and Treasury bonds

D. Treasury bonds and Eurodollars

41. The typical hedge fund fee structure is

D. a management fee of 1% to 2% and an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance

. The debate over whether markets are efficient will probably never be resolved because of ________. A. the lucky event issue. B. the magnitude issue. C. the selection bias issue. D. all of the above. E. none of the above

D. all of the above Factors A, B, and C all exist make rigid testing of market efficiency difficult or impossible.

The North American Industry Classification System (NAICS) codes A. are for firms that operate in the NAFTA region.B. group firms by industry.C. are a perfect classification system for firms.D. are for firms that operate in the NAFTA region and group firms by industry.E. are for firms that operate in the NAFTA region and are a perfect classification system for firms.

D. are for firms that operate in the NAFTA region and group firms by industry.

D. are; are not

4. Alpha seeking hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

D. bet on; hedge

The "normal" range of price-earnings ratios for the S&P500 Index is A. between 2 and 10.B. between 5 and 15.C. less than 8.D. between 12 and 25.E. greater than 20.

D. between 12 and 25.

A hedge ratio for a put is always __________. A. equal to one B. greater than one C. between zero and one D. between minus one and zero E. of no restricted value

D. between minus one and zero

Studies of negative earnings surprises have shown that there is A. a negative abnormal return on the day negative earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. both A and B are true. E. both A and C are true.

D. both A and B are true. The market appears to adjust to earnings information gradually, resulting in a sustained period of abnormal returns.

Studies of positive earnings surprises have shown that there is A. a positive abnormal return on the day positive earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. both A and B are true. E. both A and C are true.

D. both A and B are true. The market appears to adjust to earnings information gradually, resulting in a sustained period of abnormal returns.

27. Studies of negative earnings surprises have shown that there is A. a negative abnormal return on the day negative earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. E. both a negative abnormal return on the day negative earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

D. both a negative abnormal return on the day negative earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.

26. Studies of positive earnings surprises have shown that there is A. a positive abnormal return on the day positive earnings surprises are announced. B. a positive drift in the stock price on the days following the earnings surprise announcement. C. a negative drift in the stock price on the days following the earnings surprise announcement. D. both a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement. E. both a positive abnormal return on the day positive earnings surprises are announced and a negative drift in the stock price on the days following the earnings surprise announcement.

D. both a positive abnormal return on the day positive earnings surprises are announced and a positive drift in the stock price on the days following the earnings surprise announcement.

Assume the U. S. government was to decide to increase the budget deficit. This action will most likely cause __________ to increase. A. interest ratesB. government borrowingC. unemploymentD. both interest rates and government borrowingE. None of these is correct.

D. both interest rates and government borrowing

87. A collar with a net outlay of approximately zero is an options strategy that

D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put.

87. A collar with a net outlay of approximately zero is an options strategy that A. combines a put and a call to lock in a price range for a security. B. uses the gains from sale of a call to purchase a put. C. uses the gains from sale of a put to purchase a call. D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put. E. combines a put and a call to lock in a price range for a security and uses the gains from sale of a put to purchase a call.

D. combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put.

If interest rates increase, business investment expenditures are likely to ______ and consumer durable expenditures are likely to ________. A. increase, increaseB. increase, decreaseC. decrease, increaseD. decrease, decreaseE. be unaffected, be unaffected

D. decrease, decrease

57. Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. Cannot tell without further information

D. decrease; decrease

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will __________. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. Cannot tell without further information.

D. decrease; decrease

Behavioral finance argues that A. even if security prices are wrong, it may be difficult to exploit them. B. the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency. C. investors are rational. D. even if security prices are wrong, it may be difficult to exploit them and the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency. E. All of the options

D. even if security prices are wrong, it may be difficult to exploit them and the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency.

A rapidly growing GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales. A. stagnant; littleB. stagnant; ampleC. expanding; littleD. expanding; ampleE. stable; no

D. expanding; ample

Many stock analysts assume that a mispriced stock will A. immediately return to its intrinsic value.B. return to its intrinsic value within a few days.C. never return to its intrinsic value.D. gradually approach its intrinsic value over several years.E. None of these is correct.

D. gradually approach its intrinsic value over several years

88. Many stock analysts assume that a mispriced stock will A. immediately return to its intrinsic value. B. return to its intrinsic value within a few days. C. never return to its intrinsic value. D. gradually approach its intrinsic value over several years. E. None of these is correct.

D. gradually approach its intrinsic value over several years.

96. If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan. A. higher, higher B. lower, lower C. lower, higher D. higher, lower E. It is not possible to tell.

D. higher, lower

18. Researchers have found that most of the small firm effect occurs A. during the spring months. B. during the summer months. C. in December. D. in January. E. randomly.

D. in January.

Some economists believe that the anomalies literature is consistent with investors' A. ability to always process information correctly and therefore they infer correct probability distributions about future rates of return; and given a probability distribution of returns, they always make consistent and optimal decisions. B. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they always make consistent and optimal decisions. C. ability to always process information correctly and therefore they infer correct probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions. D. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions.

D. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions.

If covered interest arbitrage opportunities do not exist, __________. A. interest rate parity does not hold B. interest rate parity holds C. arbitragers will be able to make risk-free profits D. interest rate parity does not hold and arbitragers will be able to make risk-free profits E. interest rate parity holds and arbitragers will be able to make risk-free profits

D. interest rate parity does not hold and arbitragers will be able to make risk-free profits

Assume the U. S. government was to decide to decrease the budget deficit. This action will most likely cause __________ to decrease. A. interest ratesB. government borrowingC. unemploymentD. interest rates and government borrowingE. None of these is correct.

D. interest rates and government borrowing

Assume the U. S. government was to decide to increase the budget deficit. This action will most likely cause __________ to increase. A. interest ratesB. government borrowingC. unemploymentD. interest rates and government borrowingE. None of these is correct.

D. interest rates and government borrowing

LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

D. investors view the international joint venture as good news The positive abnormal return suggests that investors view the international joint venture as good news

58. LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

D. investors view the international joint venture as good news.

11. The Gordon model A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B. is valid only when g is less than k. C. is valid only when k is less than g. D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k. E. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g.

D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.

The Gordon model A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity.B. is valid only when g is less than k.C. is valid only when k is less than g.D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.E. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g.

D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.

The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call __________. A. is out of the money B. is in the money C. sells for a higher price than if the market price of Boeing stock is $70 D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70 E. is in the money and sells for a higher price than if the market price of Boeing stock is $70

D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70 A call is out of the money when the asset price is less than the exercise price.

The current market price of a share of AT&T stock is $50. If a put option on this stock has a strike price of $45, the put A. is out of the money. B. is in the money. C. sells for a lower price than if the market price of AT&T stock is $40. D. is out of the money and sells for a lower price than if the market price of AT&T stock is $40. E. is in the money and sells for a lower price than if the market price of AT&T stock is $40.

D. is out of the money and sells for a lower price than if the market price of AT&T stock is $40.

86. Financial engineering

D. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for institutional investor.

86. Financial engineering A. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security. B. primarily takes place for institutional investor. C. primarily takes places for the individual investor. D. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for institutional investor. E. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes places for the individual investor.

D. is the custom designing of securities or portfolios with desired patterns of exposure to the price of the underlying security and primarily takes place for institutional investor.

The lower bound on the market price of a convertible bond is __________. A. its straight bond value B. its crooked bond value C. its conversion value D. its straight bond value and its conversion value E. None of the options.

D. its straight bond value and its conversion value A convertible bond is a straight bond plus an embedded call option. The market price of a convertible bond is made up of the straight bond value and the conversion value, which is the market value of the underlying equity into which a convertible security may be exchanged.

4. A hybrid strategy is one where the investor A. uses both fundamental and technical analysis to select stocks. B. selects the stocks of companies that specialize in alternative fuels. C. selects some actively-managed mutual funds on their own and uses an investment advisor to select other actively-managed funds. D. maintains a passive core and augments the position with an actively managed portfolio. E. none of the above.

D. maintains a passive core and augments the position with an actively managed portfolio. A hybrid strategy is one where the investor maintains a passive core and augments the position with an actively managed portfolio.

10. The open interest on silver futures at a particular time is the A. number of silver futures contracts traded during the day. B. number of outstanding silver futures contracts for delivery within the next month. C. number of silver futures contracts traded the previous day. D. number of all long or short silver futures contracts outstanding. E. None of these is correct.

D. number of all long or short silver futures contracts outstanding.

85. Common size income statements make it easier to compare firms ___________. A. that use different inventory valuation methods (FIFO vs. LIFO) B. in different industries C. with different degree of leverage D. of different sizes E. None of these is correct.

D. of different sizes

75. Proceeds from a company's sale of stock to the public are included in _______. A. par value B. additional paid-in capital C. retained earnings D. par value and retained earnings E. par value, retained earnings, and retained earnings

D. par value and retained earnings

Before expiration, the time value of an at-the-money put option is always __________. A. equal to zero B. equal to the stock price minus the exercise price C. negative D. positive E. None of the options.

D. positive

47. If stock prices follow a random walk A. it implies that investors are irrational. B. it means that the market cannot be efficient. C. price levels are not random. D. price changes are random. E. price movements are predictable.

D. price changes are random.

If stock prices follow a random walk A. it implies that investors are irrational. B. it means that the market cannot be efficient. C. price levels are not random. D. price changes are random. E. price movements are predictable.

D. price changes are random. A random walk means that the changes in prices are random and independent

12. A European put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price increase. D. sell the underlying asset at the striking price on the expiration date. E. potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

D. sell the underlying asset at the striking price on the expiration date.

A European put option allows the holder to A. buy the underlying asset at the striking price on or before the expiration date. B. sell the underlying asset at the striking price on or before the expiration date. C. potentially benefit from a stock price increase. D. sell the underlying asset at the striking price on the expiration date. E. potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

D. sell the underlying asset at the striking price on the expiration date.

33. If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by A. buying all the stocks in the S&P 500 and selling put options on the S&P 500 index. B. selling short all the stocks in the S&P 500 and buying S&P Index futures. C. selling all the stocks in the S&P 500 and buying call options on the S&P 500 index. D. selling S&P 500 Index futures and buying all the stocks in the S&P 500. E. None of these is correct

D. selling S&P 500 Index futures and buying all the stocks in the S&P 500.

Empirical tests of the Black-Scholes option pricing model __________. A. show that the model generates values fairly close to the prices at which options trade B. show that the model tends to overvalue deep in-the-money calls and undervalue deep out of the money calls C. indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks E. All of the above

D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks

Tests of market efficiency have focused on A. the mean-variance efficiency of the selected market proxy. B. strategies that would have provided superior risk-adjusted returns. C. results of actual investments of professional managers. D. strategies that would have provided superior risk-adjusted returns and results of actual investments of professional managers. E. the mean-variance efficiency of the selected market proxy and strategies that would have provided superior risk-adjusted returns.

D. strategies that would have provided superior risk-adjusted returns and results of actual investments of professional managers.

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the A. strike price B. exercise price C. execution price D. strike price or exercise price E. strike price or execution price

D. strike price or exercise price

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the __________. A. strike price B. exercise price C. execution price D. strike price or exercise price E. strike price or execution price

D. strike price or exercise price

6. The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the A. strike price. B. exercise price. C. execution price. D. strike price or exercise price. E. strike price or execution price.

D. strike price or exercise price.

The weak form of the efficient market hypothesis contradicts A. technical analysis, but supports fundamental analysis as valid. B. fundamental analysis, but supports technical analysis as valid. C. both fundamental analysis and technical analysis. D. technical analysis, but is silent on the possibility of successful fundamental analysis. E. None of these is correct.

D. technical analysis, but is silent on the possibility of successful fundamental analysis

37. The weak form of the efficient market hypothesis contradicts A. technical analysis, but supports fundamental analysis as valid. B. fundamental analysis, but supports technical analysis as valid. C. both fundamental analysis and technical analysis. D. technical analysis, but is silent on the possibility of successful fundamental analysis. E. None of these is correct.

D. technical analysis, but is silent on the possibility of successful fundamental analysis.

D. technical analysis, but is silent on the possibility of successful fundamental analysis. The process of fundamental analysis makes the market more efficient, and thus the work of the fundamentalist more difficult. The data set for the weak form of the EMH is market data, which is the only data used exclusively by technicians. Fundamentalists use all public information.

The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that A. the market is not efficient. B. King stock will probably rise in value tomorrow. C. King stock will probably fall in value tomorrow. D. the approval was already anticipated by the market E. none of the above.

D. the approval was already anticipated by the market The approval was already anticipated by the market

60. The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that A. the market is not efficient. B. King stock will probably rise in value tomorrow. C. King stock will probably fall in value tomorrow. D. the approval was already anticipated by the market. E. None of these is correct

D. the approval was already anticipated by the market.

The main difference between the three forms of market efficiency is that A. the definition of efficiency differs. B. the definition of excess return differs. C. the definition of prices differs. D. the definition of information differs. E. they were discovered by different people.

D. the definition of information differs

48. The main difference between the three forms of market efficiency is that A. the definition of efficiency differs. B. the definition of excess return differs. C. the definition of prices differs. D. the definition of information differs. E. they were discovered by different people.

D. the definition of information differs.

7. A firm has a lower asset turnover ratio than the industry average, which implies A. the firm has a lower P/E ratio than other firms in the industry. B. the firm is less likely to avoid insolvency in the short run than other firms in the industry. C. the firm is less profitable than other firms in the industry. D. the firm is utilizing assets less efficiently than other firms in the industry. E. the firm has lower spending on new fixed assets than other firms in the industry.

D. the firm is utilizing assets less efficiently than other firms in the industry.

91. According to Peter Lynch, a rough rule of thumb for security analysis is that A. the growth rate should be equal to the plowback rate. B. the growth rate should be equal to the dividend payout rate. C. the growth rate should be low for emerging industries. D. the growth rate should be equal to the P/E ratio. E. None of these is correct.

D. the growth rate should be equal to the P/E ratio.

62. At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with ________. A. regret avoidance B. selection bias C. overconfidence D. the lucky event issue E. None of these is correct

D. the lucky event issue

99. Earnings management is A. when management makes changes in the operations of the firm to ensure that earnings do not increase or decrease too rapidly. B. when management makes changes in the operations of the firm to ensure that earnings do not increase too rapidly. C. when management makes changes in the operations of the firm to ensure that earnings do not decrease too rapidly. D. the practice of using flexible accounting rules to improve the apparent profitability of the firm. E. None of these is correct.

D. the practice of using flexible accounting rules to improve the apparent profitability of the firm.

59. A covered call position is A. the simultaneous purchase of the call and the underlying asset. B. the purchase of a share of stock with a simultaneous sale of a put on that stock. C. the short sale of a share of stock with a simultaneous sale of a call on that stock. D. the purchase of a share of stock with a simultaneous sale of a call on that stock. E. the simultaneous purchase of a call and sale of a put on the same stock.

D. the purchase of a share of stock with a simultaneous sale of a call on that stock.

GDP refers to ________. A. the amount of personal disposable income in the economyB. the difference between government spending and government revenuesC. the total manufacturing output in the economyD. the total production of goods and services in the economyE. None of these is correct.

D. the total production of goods and services in the economy

23. All the inputs in the Black-Scholes Option Pricing Model are directly observable except

D. the variance of returns of the underlying asset return.

96. Derivative securities are also called contingent claims because

D. their payoffs depend on the prices of other assets.

96. Derivative securities are also called contingent claims because A. their owners may choose whether or not to exercise them. B. a large contingent of investors holds them. C. the writers may choose whether or not to exercise them. D. their payoffs depend on the prices of other assets. E. contingency management is used in adding them to portfolios.

D. their payoffs depend on the prices of other assets.

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be _______. A. 0.60 B. 0.40 C. -0.60 D.-0.40 E. -.17

D.-0.40 Call hedge ratio = N(d1) Put hedge ratio = N(d1) −1 0.6 −1.0 = −0.4

Which one of the following stock index futures has a multiplier of $10 times the index value?

Dow Jones Industrial Average

Financial futures contracts are actively traded on which of the following indices?

Dow Jones, S&P, NYSE, and Nikkei

. Interest rate futures contracts are actively traded on the A. eurodollars. B. euroyen. C. sterling. D. eurodollars and euroyen. E. All of the options are correct.

A French investor has purchased bonds denominated in Swiss francs that have been issued by a Swiss corporation with a mediocre credit rating. Which of the following is a source of risk for this investment? (a) Interest rate risk on Swiss francs (b) Currency risk (c) Credit risk (d) a and b only. (e) a, b, and c.

Because the DDM requires multiple estimates, investors should A. carefully examine inputs to the model. B. perform sensitivity analysis on price estimates. C. not use this model without expert assistance. D. feel confident that DDM estimates are correct. E. carefully examine inputs to the model and perform sensitivity analysis on price estimates.

Financial futures contracts are actively traded on which of the following indices? A. The S&P 500 Index B. The New York Stock Exchange Index C. The Nikkei Index D. The Dow Jones Industrial Index E. All of the options are correct.

Foreign currency futures contracts are actively traded on the A. Japanese yen. B. Australian dollar. C. Brazilian real. D. Japanese yen and Australian dollar. E. All of the options are correct.

High Tech Chip Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be A. 5.00%. B. 6.25%. C. 6.60%. D. 7.50%. E. 8.75%.

Metals and energy currency futures contracts are actively traded on A. copper. B. platinum. C. weather. D. copper and platinum. E. All of the options are correct.

Metals and energy currency futures contracts are actively traded on A. gold. B. silver. C. propane. D. gold and silver. E. All of the options are correct.

Old Style Corporation produces goods that are very mature in their product life cycles. Old Style Corporation is expected to have per share FCFE in year 1 of $1.00, per share FCFE of $0.90 in year 2, and per share FCFE of $0.85 in year 3. After year 3, per share FCFE is expected to decline at a rate of 2% per year. An appropriate required rate of return for the stock is 8%. The stock should be worth _______ today. A. $127.63 B. $10.57 C. $20.00 D. $22.22 E. $8.98

Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Paper Express's market value per share? A. $1.68 B. $2.60 C. $32.14 D. $60.71 E. None of the options are correct.

Stingy Corporation is expected have EBIT of $1.2M this year. Stingy Corporation is in the 30% tax bracket, will report $133,000 in depreciation, will make $76,000 in capital expenditures, and will have a $24,000 increase in net working capital this year. What is Stingy's FCFF? A. 1,139,000 B. 1,200,000 C. 1,025,000 D. 921,000 E. 873,000

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate? A. 0.0% B. 10% C. 4% D. 6% E. 7%

The _________ is the fraction of earnings reinvested in the firm. A. dividend payout ratio B. retention rate C. plowback ratio D. dividend payout ratio and plowback ratio E. retention rate or plowback ratio

The growth in per share FCFE of SYNK, Inc. is expected to be 8% per year for the next two years, followed by a growth rate of 4% per year for three years. After this five-year period, the growth in per share FCFE is expected to be 3% per year, indefinitely. The required rate of return on SYNC, Inc. is 11%. Last year's per share FCFE was $2.75. What should the stock sell for today? A. $28.99 B. $35.21 C. $54.67 D. $56.37 E. $39.71

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the a) strike price b)exercise price c) execution price d)strike price or execution price e) strike price or exercise price

The price that the buyer of a call option pays to acquire the option is called the a) strike price b)exercise price c) execution price d)acquisition price e) premium

Which of the following statements regarding delivery is false? I) Most futures contracts result in actual delivery. II) Only 1% to 3% of futures contracts result in actual delivery. III) Only 15% of futures contracts result in actual delivery. A. I only B. II only C. III only D. I and II E. I and III

Who popularized the dividend discount model, which is sometimes referred to by his name? A. Burton Malkiel B. Frederick Macaulay C. Harry Markowitz D. Marshall Blume E. Myron Gordon

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $3.50 in dividends and $42 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return. A. $23.91 B. $24.11 C. $26.52 D. $27.50 E. None of the options are correct.

E) are wasting their time. Answer: E Difficulty: Moderate Rationale: Technical analysts attempt to predict future stock prices from historic stock prices; proponents of EMH believe that stock price changes are random variables.

A finding that _________ would provide evidence against the semistrong form of the efficient market theory. A. low P/E stocks tend to have positive abnormal returns B. trend analysis is worthless in determining stock prices C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon D. A and B E. A and C

E. A and C Both A and C are inconsistent with the semistrong form of the EMH. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

___________ the return on a stock beyond what would be predicted from market movements alone. A. An excess economic return is B. An economic return is C. An abnormal return is D. A and B E. A and C

E. A and C An economic return is the expected return, based on the perceived level of risk and market factors. When returns exceed these levels, the returns are called abnormal or excess economic returns.

E. A, B, and C A, B, and C are true; however, even in an efficient market one should be able to earn the appropriate risk-adjusted rate of return.

Work by Amihud and Mendelson (1986, 1991) A. argues that investors will demand a rate of return premium to invest in less liquid stocks. B. may help explain the small firm effect. C. may be related to the neglected firm effect. D. B and C. E. A, B, and C.

E. A, B, and C. Lack of liquidity may affect the returns of small and neglected firms; however the theory does not explain why the abnormal returns are concentrated in January.

46. Binary options A. are based on two possible outcomes—yes or no. B. may make a payoff of a fixed amount if a specified event happens. C. may make a payoff of a fixed amount if a specified event does not happen. D. may make a payoff of a fixed amount if a specified event happens and are based on two possible outcomes—yes or no. E. All of the options

E. All of the options

85. Some more "traditional" assets have optionlike features; some of these instruments include A. callable bonds. B. convertible bonds. C. warrants. D. callable bonds and convertible bonds. E. All of the options

E. All of the options

A swap __________. A. obligates two counterparties to exchange cash flows at one or more future dates B. allows participants to restructure their balance sheets C. allows a firm to convert outstanding fixed rate debt to floating rate debt D. obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets Correct! E. All of the options.

E. All of the options.

16. Financial futures contracts are actively traded on the following indices except A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All of these indices have actively traded futures contracts

E. All of these indices have actively traded futures contracts

7. Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. A and B E. B and C

E. B and C Believers of market efficiency advocate passive investment strategies, and an investment in an index fund is one of the most practical passive investment strategies, especially for small investors.

12. Which of the following statements regarding delivery is most false? A. Most futures contracts result in actual delivery. B. Only one to three percent of futures contracts result in actual delivery. C. Only fifteen percent of futures contracts result in actual delivery. D. Both most futures contracts result in actual delivery and only one to three percent of futures contracts result in actual delivery E. Both most futures contracts result in actual delivery and only fifteen percent of futures contracts result in actual delivery

E. Both most futures contracts result in actual delivery and only fifteen percent of futures contracts result in actual delivery

32. The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships.

E. CAPM, will be and APT, will be

74. ______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities. A. Net Sales B. Operating Income C. Net Income D. Non-operating Income E. Earnings Before Interest and Taxes

E. Earnings Before Interest and Taxes

The time value of a put option is __________. I) the difference between the option's price and the value it would have if it were expiring immediately II) the same as the present value of the option's expected future cash flows III) the difference between the option's price and its expected future value IV) different from the usual time value of money concept A. I B. I and II C. II and III D. II E. I and IV

E. I and IV

Which of the following are key economic statistics that are used to describe the state of the macroeconomy? I) Gross domestic productII) The unemployment rateIII) InflationIV) Consumer sentimentV) The budget deficit A. I, II, and VB. I, III, and VC. I, II, and IIID. I, II, III, and VE. I, II, III, IV, and V

E. I, II, III, IV, and V

4. Information processing errors consist of I) forecasting errors. II) overconfidence. III) conservatism. IV) framing. A. I and II B. I and III C. III and IV D. IV only E. I, II, and III

E. I, II, and III

Which two indices had the lowest correlation between them during the 2008-2012 period? A. S&P and DJIA; the correlation was 0.979 B. S&P and NASDAQ 100; the correlation was 0.928 C. DJIA and Russell 2000 the correlation was 0.908 D. S&P and Russell 2000; the correlation was 0.948 E. NASDAQ 100 and DJIA; the correlation was 0.876

E. NASDAQ 100 and DJIA; the correlation was 0.876

8. The price that the writer of a put option receives for the underlying asset if the option is exercised is called the A. strike price. B. exercise price. C. execution price. D. strike price or exercise price. E. None of the options

E. None of the options

The price that the buyer of a call option pays to acquire the option is called the A. strike price B. exercise price C. execution price D. acquisition price E. premium

E. Premium

The price that the writer of a call option receives to sell the option is called the A. strike price B. exercise price C. execution price D. acquisition price E. premium

E. Premium

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the A. strike price B. exercise price C. execution price D. strike price or execution price E. strike price or exercise price

E. Strike price or exercise price

32. Which of the following statements regarding "basis" is most true? A. The basis is the difference between the futures price and the spot price. B. The basis risk is borne by the hedger. C. A short hedger suffers losses when the basis decreases. D. The basis increases when the futures price increases by more than the spot price. E. The basis is the difference between the futures price and the spot price, the basis risk is borne by the hedger, and the basis increases when the futures price increases by more than the spot price

E. The basis is the difference between the futures price and the spot price, the basis risk is borne by the hedger, and the basis increases when the futures price increases by more than the spot price

15. Which of the following statements is most false? A. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. B. If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call. C. A margin deposit can only be met with cash. D. All futures contracts require the same margin deposit. E. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract, a margin deposit can only be met with cash, and all futures contracts require the same margin deposit

E. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract, a margin deposit can only be met with cash, and all futures contracts require the same margin deposit

67. Which of the following factors affect the price of a stock option? A. The risk-free rate B. The riskiness of the stock C. The time to expiration D. The expected rate of return on the stock E. The risk-free rate, riskiness of the stock, and time to expiration

E. The risk-free rate, riskiness of the stock, and time to expiration

An example of a positive demand shock is A. a decrease in the money supply.B. a decrease in government spending.C. a decrease in foreign export demand.D. a decrease in the price of imported oil.E. a decrease in tax rates.

E. a decrease in tax rates

An example of a negative demand shock is A. a decrease in the money supply.B. a decrease in government spending.C. an increase in foreign export demand.D. a decrease in the price of imported oil.E. a decrease in the money supply and a decrease in government spending.

E. a decrease in the money supply and a decrease in government spending.

25. Proponents of the EMH think technical analysts A. should focus on relative strength. B. should focus on resistance levels. C. should focus on support levels. D. should focus on financial statements. E. are wasting their time.

E. are wasting their time.

An example of a defensive industry is _______. A. the automobile industryB. the tobacco industryC. the food industryD. both the automobile industry and the tobacco industryE. both the tobacco industry and the food industry

E. both the tobacco industry and the food industry

An American call option allows the buyer to A. sell the underlying asset at the exercise price on or before the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

90. Because the DDM requires multiple estimates, investors should A. carefully examine inputs to the model. B. perform sensitivity analysis on price estimates. C. not use this model without expert assistance. D. feel confident that DDM estimates are correct. E. carefully examine inputs to the model and perform sensitivity analysis on price estimates.

E. carefully examine inputs to the model and perform sensitivity analysis on price estimates.

Because the DDM requires multiple estimates, investors should A. carefully examine inputs to the model.B. perform sensitivity analysis on price estimates.C. not use this model without expert assistance.D. feel confident that DDM estimates are correct.E. carefully examine inputs to the model and perform sensitivity analysis on price estimates.

E. carefully examine inputs to the model and perform sensitivity analysis on price estimates.

55. Call options on IBM listed stock options are A. issued by IBM Corporation. B. created by investors. C. traded on various exchanges. D. issued by IBM Corporation and traded on various exchanges. E. created by investors and traded on various exchanges.

E. created by investors and traded on various exchanges.

3. An example of a liquidity ratio is ______. A. fixed asset turnover B. current ratio C. acid test or quick ratio D. fixed asset turnover and acid test or quick ratio E. current ratio and acid test or quick ratio

E. current ratio and acid test or quick ratio Both B and C are measures of liquidity; A relates to fixed assets.

7. If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. A. framing B. selection bias C. overconfidence D. conservatism E. forecasting

E. forecasting

34. The weak form of the efficient market hypothesis asserts that A. stock prices do not rapidly adjust to new information contained in past prices or past data. B. future changes in stock prices cannot be predicted from past prices. C. technicians cannot expect to outperform the market. D. stock prices do not rapidly adjust to new information contained in past prices or past data and future changes in stock prices cannot be predicted from past prices E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market

E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market

The weak form of the efficient market hypothesis asserts that A. stock prices do not rapidly adjust to new information contained in past prices or past data. B. future changes in stock prices cannot be predicted from past prices. C. technicians cannot expect to outperform the market. D. stock prices do not rapidly adjust to new information contained in past prices or past data and future changes in stock prices cannot be predicted from past prices E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market

E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market

The weak form of the efficient market hypothesis asserts that

E. future changes in stock prices cannot be predicted from past prices and technicians cannot expect to outperform the market.

Demand-side economics is concerned with ______. A. government spending and tax levelsB. monetary policyC. fiscal policyD. government spending and tax levels and monetary policyE. government spending and tax levels, monetary policy, and fiscal policy

E. government spending and tax levels, monetary policy, and fiscal policy

The efficient market hypothesis A. implies that security prices properly reflect information available to investors. B. has little empirical validity. C. implies that active traders will find it difficult to outperform a buy-and-hold strategy. D. has little empirical validity and implies that active traders will find it difficult to outperform a buy-and-hold strategy. E. implies that security prices properly reflect information available to investors and that active traders will find it difficult to outperform a buy-and-hold strategy.

E. implies that security prices properly reflect information available to investors and that active traders will find it difficult to outperform a buy-and-hold strategy.

According to proponents of the efficient market hypothesis, the best strategy for a small investor with a portfolio worth $40,000 is probably to A. perform fundamental analysis. B. exploit market anomalies. C. invest in Treasury securities. D. invest in derivative securities. E. invest in mutual funds.

E. invest in mutual funds Individual investors tend to have relatively small portfolios and are usually unable to realize economies of size. The best strategy is to pool funds with other small investors and allow professional managers to invest the funds.

Proponents of the EMH typically advocate A. an active trading strategy. B. investing in an index fund. C. a passive investment strategy. D. an active trading strategy and investing in an index fund E. investing in an index fund and a passive investment strategy

E. investing in an index fund and a passive investment strategy

The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put __________. A. is out of the money B. is in the money C. can be exercised profitably D. is out of the money and can be exercised profitably E. is in the money and can be exercised profitably

E. is in the money and can be exercised profitably In the money (ITM) means that a call option's strike price is below the market price of the underlying asset, or that the strike price of a put option is above the market price of the underlying asset.

The current market price of a share of CAT stock is $76. If a put option on this stock has a strike price of $80, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably.

The current market price of a share of Disney stock is $30. If a put option on this stock has a strike price of $35, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably.

The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably.

The current market price of a share of PALM stock is $75. If a put option on this stock has a strike price of $79, the put A. is out of the money. B. is in the money. C. can be exercised profitably. D. is out of the money and can be exercised profitably. E. is in the money and can be exercised profitably.

E. is in the money and can be exercised profitably.

The current market price of a share of JNJ stock is $60. If a put option on this stock has a strike price of $55, the put A. is in the money. B. is out of the money. C. sells for a lower price than if the market price of JNJ stock is $50. D. is in the money and sells for a lower price than if the market price of JNJ stock is $50. E. is out of the money and sells for a lower price than if the market price of JNJ stock is $50.

E. is out of the money and sells for a lower price than if the market price of JNJ stock is $50

The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put A. is in the money. B. is out of the money. C. sells for a lower price than if the market price of the stock is $75. D. is in the money and sells for a lower price than if the market price of the stock is $75. E. is out of the money and sells for a lower price than if the market price of the stock is $75.

E. is out of the money and sells for a lower price than if the market price of the stock is $75.

36. A finding that _________ would provide evidence against the semistrong form of the efficient market theory. A. low P/E stocks tend to have positive abnormal returns B. trend analysis is worthless in determining stock prices C. one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon D. low P/E stocks tend to have positive abnormal returns and trend analysis is worthless in determining stock prices E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

E. low P/E stocks tend to have positive abnormal returns and one can consistently outperform the market by adopting the contrarian approach exemplified by the reversals phenomenon

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the A. strike price B. exercise price C. execution price D. strike price or exercise price E. None of these is correct

E. none of these is correct

Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be ________. A. extremely profitable for long-term traders B. extremely profitable for short-term traders C. marginally profitable for long-term traders D. marginally profitable for short-term traders E. not sufficiently profitable to cover trading costs

E. not sufficiently profitable to cover trading costs Answer E; not sufficiently profitable to cover trading costs

The price that the writer of a call option receives to sell the option is called the __________. A. strike price B. exercise price C. execution price D. acquisition price E. premium

E. premium The purchase price of the option is called the premium. It represents the compensation the purchaser of the call must pay for the right to exercise the option only when exercise is desirable.

1. The price that the buyer of a call option pays to acquire the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium.

E. premium.

2. The price that the writer of a call option receives to sell the option is called the A. strike price. B. exercise price. C. execution price. D. acquisition price. E. premium.

E. premium.

33. In an efficient market, __________. A. security prices react quickly to new information B. security prices are seldom far above or below their justified levels C. security analysis will not enable investors to realize superior returns consistently D. one cannot make money E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently

E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently

In an efficient market, __________. A. security prices react quickly to new information B. security prices are seldom far above or below their justified levels C. security analysis will not enable investors to realize superior returns consistently D. one cannot make money E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently

E. security prices react quickly to new information, are seldom far above or below their justified levels, and security analysis will not enable investors to realize superior returns consistently

10. A European call option allows the buyer to A. sell the underlying asset at the exercise price on the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. buy the underlying asset at the exercise price on the expiration date. E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

A European call option allows the buyer to A. sell the underlying asset at the exercise price on the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. buy the underlying asset at the exercise price on the expiration date. E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

E. sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the A. strike price B. exercise price C. execution price D. strike price or execution price E. strike price or exercise price

E. strike price or exercise price

5. The price that the buyer of a call option pays for the underlying asset if she executes her option is called the A. strike price. B. exercise price. C. execution price. D. strike price or execution price. E. strike price or exercise price.

E. strike price or exercise price.

7. The price that the buyer of a put option receives for the underlying asset if she executes her option is called the A. strike price. B. exercise price. C. execution price. D. strike price or execution price. E. strike price or exercise price.

E. strike price or exercise price.

2. A firm has a lower quick (or acid test) ratio than the industry average, which implies A. the firm has a lower P/E ratio than other firms in the industry. B. the firm is less likely to avoid insolvency in the short run than other firms in the industry. C. the firm may be more profitable than other firms in the industry. D. the firm has a lower P/E ratio than other firms in the industry and the firm is less likely to avoid insolvency in the short run than other firms in the industry. E. the firm is less likely to avoid insolvency in the short run than other firms in the industry and the firm may be more profitable than other firms in the industry.

E. the firm is less likely to avoid insolvency in the short run than other firms in the industry and the firm may be more profitable than other firms in the industry. Current assets earn less than fixed assets; thus, a firm with a relatively low level of current assets may be more profitable than other firms. However, its low level of current assets makes it less liquid.

1. A firm has a higher quick (or acid test) ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry. B. the firm is more likely to avoid insolvency in the short run than other firms in the industry. C. the firm may be less profitable than other firms in the industry. D. the firm has a higher P/E ratio than other firms in the industry and the firm is more likely to avoid insolvency in the short run than other firms in the industry. E. the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry.

E. the firm is more likely to avoid insolvency in the short run than other firms in the industry and the firm may be less profitable than other firms in the industry. Current assets earn less than fixed assets; thus, a firm with a relatively high level of current assets may be less profitable than other firms. However, its high level of current assets makes it more liquid.

24. Which of the inputs in the Black-Scholes Option Pricing Model are directly observable

E. the price of the underlying security, the risk free rate of interest, and the time to expiration.

67. Which of the following factors affect the price of a stock option

E. the risk-free rate, the riskiness of the stock, and the time to expiration.

Which of the following factors affect the price of a stock option A. the risk-free rate. B. the riskiness of the stock. C. the time to expiration. D. the expected rate of return on the stock. E. the risk-free rate, the riskiness of the stock, and the time to expiration.

E. the risk-free rate, the riskiness of the stock, and the time to expiration.

86. Vega is defined as

E. the sensitivity of an option's price to changes in volatility.

The value of a stock put option is positively related to __________. A. the time to expiration B. the striking price C. the stock price D All of the options. E. the time to expiration and the striking price

E. the time to expiration and the striking price

70. The value of a stock put option is positively related to A. the time to expiration. B. the striking price. C. the stock price. D. All of the options E. the time to expiration and the striking price.

E. the time to expiration and the striking price.

The value of a stock put option is positively related to A. the time to expiration. B. the striking price. C. the stock price. D. all listed answers. E. the time to expiration and the striking price.

E. the time to expiration and the striking price.

If the futures market price is 1.63 A$/$, how could you arbitrage?

E0(1 + rUS) −FO(1 + rA); use the U. S. $values for the currency: 0.5988(1.04) −0.6135(1.03) = −0.009153; when relationship is negative, action b will result in arbitrage profits.

28. Refer to the financial statements of Black Barn Company. The firm's P/E ratio for 2009 is ____.

EPS = $660,000/130,000 = $5.08; $40/$5.08 = 7.88.

______ is a measure of what the firm would have earned if it didn't have any obligations to creditors or tax authorities.

Earnings Before Interest and Taxes

90. Discuss the differences between economic earnings and accounting earnings. Which is preferred in financial analysis? Which is most widely used, and why?

Economic earnings consist of the sustainable cash flow that can be paid out to stockholders without impairing the productive capacity of the firm. The focus is on the present value of expected cash flows. Accounting earnings are based on accrual methods and can be manipulated to a certain extent. They are subject to the firm's decisions about its accounting methods such as inventory valuation and amortization of capital expenditures. Net Income will be different in each case. Financial analysis is based on economic earnings, which are often difficult to measure, whereas accounting earnings are widely available. Annual and quarterly reports contain a firm's financial statements. They do provide important information about the health and prospects of the firm. Accounting earnings are therefore most frequently used for analysis. Feedback: This question tests whether the student understands the differences between the two types of earnings, why they differ, and how the difference influences the choice of earnings used in financial analysis.

Foreign currency futures contracts are actively traded on the

Euro and British pound.

59. Given a stock index with a value of $1,000, an anticipated dividend of $30 and a risk- free rate of 6%, what should be the value of one futures contract on the index?

F = 1000*(1.06) - 30; F = 1030.00. $1030.00

Given a stock index with a value of $1100, an anticipated dividend of $27 and a risk-free rate of 3%, that should be the value of one futures contract on the index?

F = 1100*(1.03) − 27; F = 1106.00

60. Given a stock index with a value of $1,125, an anticipated dividend of $33 and a risk-free rate of 4%, what should be the value of one futures contract on the index?

F = 1125*(1.04) - 33; F = 1137.00. $1137.00

Given a stock index with a value of $1,200, an anticipated dividend of $45 and a risk-free rate of 6%, what should be the value of one futures contract on the index?

F = 1200*(1.06) − 45; F = 1227.00

52. Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk- free rate of 5.75%, what should be the value of one futures contract on the index?

F = 1500*(1+.0575) - 62; F = 1524.25. $1524.25

A trade who has a long position in oil futures implicitly believes the price of oil will decrease in the future

False

Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict the probability of a firm becoming a takeover target

False

Carrying out structural reform can have an immediate positive effect on sovereign debt crisis

False

________ are analysts who use information concerning current and prospective profitability of a firm to assess the firm's fair market value.

Fundamental analysts

Describe the differences between futures and forward contracts.

Futures contracts are traded on the organized exchanges and are standardized as to the contract size, the acceptable grade of the commodity, and the contract delivery date. A forward contract is only a commitment to contract in the future. No money exchanges hands initially. The contract is for a deferred delivery of an asset at an agreed upon price.

Which would help a firm to earn a higher rating from the bond rating agencies?

High liquidity Ratios

If interest rates do not change, a year from now, the duration of portfolio P will increase/stay the same/decrease?

Holding all else equal, duration decreases as time to maturity decreases.

Which of the following items is specified in a futures contract? I) the contract size II) the maximum acceptable price range during the life of the contract III) the acceptable grade of the commodity on which the contract is held IV) the market price at expiration V) the settlement price

I) the contract size III) the acceptable grade of the commodity on which the contract is held V) the settlement price

The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option. II) the stock price volatility is constant over the life of the option. III) the expected rate of return on the stock is constant over the life of the option. IV) there will be no sudden extreme jumps in stock prices.

I, II, IV

Arbitrageurs may be unable to exploit behavioral biases due to I) fundamental risk. II) implementation costs. III) model risk. IV) conservatism. V) regret avoidance.

I, II, and III

nformation processing errors consist of I) forecasting errors. II) overconfidence. III) conservatism. IV) framing.

I, II, and III

The Black-Scholes formula assumes that: I) the risk-free interest rate is constant over the life of the option. II) the stock price volatility is constant over the life of the option. III) the expected rate of return on the stock is constant over the life of the option. IV) there will be no sudden extreme jumps in stock prices.

I, II, and IV The risk-free rate and stock price volatility are assumed to be constant but the option value does not depend on the expected rate of return on the stock. The model also assumes that stock prices will not jump markedly.

Some of the newer futures contracts include

II) weather futures. III) electricity futures.

97. You purchased a call option for $3.45 seventeen days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return? If you do not exercise the call today and it expires, what will be your holding period return?

If the call is exercised the gross profit is $51-45=$6. The net profit is $6-3.45=$2.55. The holding period return is $2.55/$3.45=.739 (73.9%). If the call is not exercised, there is no gross profit and the investor loses the full amount of the premium. The return is ($0- 3.45)/$3.45=-1.00 (-100%).

Discuss the relationships between the required rate of return on a stock, the firm's return on equity, the plowback rate, the growth rate, and the value of the firm.

If the firm earns more on retained earnings (equity) than the firm's cost of equity capital (required rate of return), the value of the firm's stock increases; therefore, the firm should retain more earnings, which will increase the growth rate and increase the value of the firm (share price). If the firm earns less on retained equity than the required rate of return, and the firm increases the retention rate and the growth rate, the firm decreases firm value, as reflected by share price. In this scenario, the shareholders would prefer that the firm pay out more of earnings in dividends, which the shareholders could invest at a greater rate of return than that earned by the firm (ROE). If the required rate of return equals the ROE, investors are indifferent between the firm's retaining earnings and paying out dividends. As a result, the retention rate and the growth rate in this scenario have no effect on firm value (stock price).

Which one of the following statements is true?

If the value of the margin account falls below the maintenance margin requirement the holder of the contract will receive a margin call

Which one of the following statements is true?

If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call.

__________ can lead investors to misestimate the true probabilities of possible events or associated rates of return.

Information processing errors

26. You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below. The fund with the highest information ratio measure is __________.

Information ratio = αP/σ(eP); A: αP = 20 - 6 - .8(19 - 6) = 3.6; 3.6/4 = 0.9; B: αP = 21 - 6 - 1(19 - 6) = 2.0; 2/1.25 = 1.6; C: αP = 23 - 6 - 1.2(19 - 6) = 1.4; 1.4/1.20 = 1.16. Fund B

The Gordon model

Is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g.

With regard to futures contracts, what does the word "margin" mean?

It is a good-faith deposit made at the time of the contract's purchase or sale.

If you wish to compute economic earnings and are trying to decide how to account for inventory, ______.

LIFO is better than FIFO

Which of the following is the best measure of the floor for a stock price?

Liquidation Value

87. Publicly traded firms must prepare audited financial statements according to generally accepted accounting principles (GAAP). How do comparability problems arise?

Many accounts may be valued by more than one generally accepted accounting principle. As a result, firms often select the GAAP that presents the firm in the most attractive position. Thus, the analyst trying to compare firms using different GAAPs must be aware of these differences and make his or her own adjustments of the financial statements in order to determine which firm is the more attractive investment alternative. Generally accepted accounting principles for inventory valuation and depreciation are two of the more common areas where comparability problems may arise. Feedback: This question is designed to ascertain whether or not the student understands whether the analyst merely takes financial statements at "face value" or whether the analyst must perform considerable additional work with the financial statements in order to value the firms.

__________ effects can help explain momentum in stock prices.

Mental accounting

Which one of the following stock index futures has a multiplier of $50 times the index value?

Mini-Russell 2000

On January 1, the listed spot and futures prices of a Treasury bond were 95.4 and 95.6. You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures contract. One month later, the listed spot price and futures prices were 95 and 94.4, respectively. If you were to liquidate your position, your profits would be

NONE OF THESE OPTIONS

The most common short term interest rate used in the swap market is

None of these is correct

34. On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be

On bonds: $94,000 - $93,250 = $750; On futures: $93,406.25 - $94,281.25 = -$875; Net profits: $750 - $875 = -$125. $125 loss

84. On January 1, the listed spot and futures prices of a Treasury bond were 95.4 and 95.6. You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures contract. One month later, the listed spot price and futures prices were 95 and 94.4, respectively. If you were to liquidate your position, your profits would be

On bonds: $95,125 - $95,000 = $125; On futures: $94,125.00 - $95,187.50 = -$1,062.50; Net profits: $125 - $1,062.50; = -$937.50. -$937.50

Which one of the following statements regarding delivery is true?

Only one to three percent of futures contracts result in actual delivery.

____________ may be responsible for the prevalence of active versus passive investments management.

Overconfidence

90. ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk free interest rate is 4%. What is the price of a one-year put with strike price of $45?

P = 9 - 38 + 45/(1.04); P = 14.26

The growth in per share FCFE of CBS, Inc. is expected to be 10%/year for the next two years, followed by a growth rate of 5%/year for three years; after this five year period, the growth in per share FCFE is expected to be 2%/year, indefinitely. The required rate of return on CBS, Inc. is 12%. Last year's per share FCFE was $2.00. What should the stock sell for today?

P5 = 2.80 (1.02)/(.12 - .02) = $28.56; PV of P5 = $28.56/(1.12)5 = $16.21; PO = $16.20 + $8.99 = $25.21 More calculation

The growth in dividends of ABC, Inc. is expected to be 15%/year for the next three years, followed by a growth rate of 8%/year for two years; after this five year period, the growth in dividends is expected to be 3%/year, indefinitely. The required rate of return on ABC, Inc. is 13%. Last year's dividends per share were $1.85. What should the stock sell for today?

P5 = 3.28 (1.03)/(.13 - .03) = $33.80; PV of P5 = $33.80/(1.13)5 = $18.35; PO = $18.35 + $9.39 = $27.74. more calculation

Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a change in stock price?

Portfolio A

Portfolio B

Price that the writer of a put option receives to sell the option is called the _______

Premium

Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$ and convert the proceeds to U. S. dollars and invest them in the U. S at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures prices (maturity of 1 year). What would be your profit (loss)?

Profit of 630 A$

33. A firm has a (net profit/pretax profit) ratio of 0.6, a leverage ratio of 2, a (pretax profit/EBIT) of 0.6, an asset turnover ratio of 2.5, a current ratio of 1.5, and a return on sales ratio of 4%. The firm's ROE is ________.

ROE = 0.6 X 0.6 X 4% X 2.5 X 2 = 7.2%.

____________ measures the extent to which a security has outperformed or underperformed either the market as a whole or its particular industry.

Relative strength

Advantages of options

Relatively cheap way to gain exposure due to the embedded leverage. Able to customize your desired payoff structure. Can be a good tool for hedging.

Which of the following ratios gives information on the amount of profits reinvested in the firm over the years?

Retained earnings/total assets

In the dividend discount model, which of the following are not incorporated into the discount rate?

Return on assets

Which one of the following stock index futures has a multiplier of $100 times the index value?

Russell 2000 and NASDAQ 100

Which one of the following stock index futures has a multiplier of $250 times the index value?

S&P 500 Index

Which one of the following stock index futures has a multiplier of $250?

S&P 500 Index

If you determine that the DAX-30 index futures is overpriced relative to the spot DAX-30 index you could make an arbitrage profit by

Selling DAX-30 index futures and buying all the stocks in the DAX-30

If a stock index futures contract is overpriced, you would exploit this situation by:

Selling the stock index futures and simultaneously buying the stocks in the index.

79. Define and discuss the Sharpe, Treynor, and Jensen measures of portfolio performance evaluation, and the situations in which each measure is the most appropriate measure.

Sharpe's measure, (rP - rf)/sP, is a relative measure of the average portfolio return in excess of the average risk-free return over a period time per unit of risk, as measured by the standard deviation of the returns of the portfolio over that time period. Treynor's measure, (rP - rf)/bP, is a relative measure of the average portfolio return in excess of the average risk-free return over a period of time per unit of risk, as measured by the beta of the portfolio over that time period. Jensen's measure, αP = rP -[rf + βP(rM - rf)], is a measure of absolute return (average return on the portfolio over a period of time) over and above that predicted by the CAPM. As the risk measure in the Sharpe measure of portfolio performance evaluation is total risk, this measure is appropriate for portfolio performance evaluation if the portfolio being evaluated represents the investor's complete portfolio of assets. As the risk measure in the Treynor measure of portfolio performance evaluation is beta, or systematic risk, this measure is the appropriate portfolio performance evaluation measure if the portfolio being evaluated is only a small part of a large investment portfolio. This measure is also appropriate for evaluation of managers of "subportfolios" of large funds, such as large pension plans. As the Jensen measure, or Jensen's alpha, measures the return of a portfolio relative to that predicted by the CAPM, this measure is appropriate for the evaluation of managers of "subportfolios" of large funds. However, the Treynor measure is an even better measure for such a scenario.

A bond has a time to maturity of 20 years, an annual coupon rate of 10% and a yield to maturity of 12%. Intuitively and without using calculations, if interest payments are reinvested at 10% and the bond is held until maturity, then annualized holding period return on this bond must be (below/equal/above) 12%?

Since the reinvestment rate is lower than the yield to maturity, the annualized HPR must be below the yield to maturity

According to the expectations hypothesis of term structure, interest rates are expected to decrease/stay the same/increase?

Since this term structure of interest rates is upward sloping, EH suggests that investors anticipate short-term rates to increase in the future.

50. Discuss some of the factors that might be included in a multifactor model of security returns in an international application of arbitrage pricing theory (APT).

Some of the factors that might be considered in a multifactor international APT model are: (A) A world stock index (B) A national (domestic) stock index (C) Industrial/sector indexes (D) Currency movements. Studies have indicated that domestic factors appear to be the dominant influence on stock returns. However, there is clear evidence of a world market factor during the market crash of October 1987.

Which of the financial statements recognizes only transactions in which cash changes hands?

Statement of Cash Flows

post-earnings announcement drift

Stock prices tend to underreact to "surprise" earnings announcements: the firm's stock tend to outperform (underperform in the weeks following a positive (negative) earnings surprise.

Momentum

Stocks that outperformed (underperformed) relative to the market over the past six months often continue to outperform (underperform) relative to the market over the next six months.

Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's ___________

Term to maturity is lower and coupon rate is higher

Discuss the Gordon, or constant discounted dividend, model of common stock valuation. Include in your discussion the advantages, disadvantages, and assumptions of the model.

The Gordon model discounts the expected dividends for the coming year by the required rate of return on the stock minus the growth rate. The growth rate is annual growth in dividends, and is assumed to be a constant annual growth rate indefinitely. Obviously such an assumption is not likely to be met; however, if dividends are expected to grow at a fairly constant rate for a considerable period of time the model may be used. The model also assumes a constant rate of growth in earnings and in the price of the stock. As a result, the payout ratio must be constant. In reality, firms have target payout ratios, usually based on industry averages; however, firms will depart from these target ratios in order to maintain the expected level of dividends in the event of a decline in earnings. In addition, the constant growth assumes that the firm's return on equity is expected to be constant indefinitely. In general, firm's return on equity (ROE) varies considerably with the economic cycle and with other variables. Some firms, however, such as public utilities have relatively stable ROEs over time. Finally, the model requires that the required rate of return be greater than the growth rate (otherwise the denominator is negative). In spite of these restricting assumptions, the Gordon model is widely used because the model is easy to use and understand, and, if the assumptions are not grossly violated, the model may produce a relatively valid valuation assessment.

Which of the following is true about profits from futures contracts?

The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

Which of the following is true about profits from futures contracts?

The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

__________ a snapshot of the financial condition of the firm at a particular time.

The balance sheet provides

Which of the following statements regarding "basis" is most true?

The basis is the difference between the futures price and the spot price, the basis risk is borne by the hedger, and the basis increases when the futures price increases by more than the spot price

You are given the following information about a portfolio you are to manage. For the long-term you are bullish, but you think the market may fall over the next month. P Value -- $1M P Beta -- .60 Current S&P value -- 1400 Anticipated S&P Value -- 1200 If the anticipated market value materializes, what will be your expected loss on the portfolio? A. 14.29% B. 16.67% C. 15.43% D. 8.57% E. 6.42%

The change would represent a drop of (1,200 - 1,400)/1,400 = 14.3% in the index. Given the portfolio's beta, your portfolio would be expected to lose 0.6 × 14.3% = 8.57%.

You took a short position in three S&P 500 futures contracts at a price of 900and closed the position when the index futures was 885, you incurred:Select one: a. A gain of $11,250. b. A loss of $11,250. c. A loss of $8,000. d. A gain of $8,000. e. None of the above.

a. A gain of $11,250. ($900 - $885) = $15 X 250 X 3 = $11,250

50. Explain the five major differences between hedge funds and mutual funds.

The five major categories of differences are transparency, investors, investment strategies, liquidity, and compensation structure. Mutual funds are more highly regulated by the SEC and thus are required to be far more transparent. Hedge funds provide only minimal information about portfolio composition or strategy. Investors in hedge funds differ in that investment minimums were traditionally set at $250,000 to $1,000,000. While newer hedge funds are starting to reduce the minimum investment to $25,000, this minimum is outside the reach of many mutual fund investors. Mutual funds must provide an investment strategy and are restricted in the use of leverage, short selling, and in their use of derivatives. However, hedge funds are less restricted and frequently make large bets that can results in large losses over the short term. Mutual funds are liquid and investors can redeem shares at NAV and have proceeds within seven business days. Conversely, hedge funds often impose lock-up periods as long as several years and require redemption notices of several months even after the lock-up period is over. Thus, hedge funds are far less liquid. While mutual funds charge a management fee, hedge funds add an incentive fee as well. This incentive fee is similar to a call option and the portfolio manager receives a "performance" bonus if the portfolio outperforms the chosen benchmark.

49. Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.

The following factors may be measured to determine the performance of an international portfolio manager. (A) Currency selection: a benchmark might be the weighted average of the currency appreciation of the currencies represented in the EAFE portfolio. (B) Country selection measures the contribution to performance attributable to investing in the better-performing stock markets of the world. Country selection can be measured as the weighted average of the equity index returns of each country using as weights the share of the manager's portfolio in each country. (C) Stock selection ability may be measured as the weighted average of equity returns in excess of the equity index in each country. (D) Cash/bond selection may be measured as the excess return derived from weighting bonds and bills differently from some benchmark weights.

32. Assume that you manage a $1.3 million portfolio that pays no dividends, has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1220. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

The hedge ratio is [$1.3M/(1220x250)] x 1.45 = 6.18. Thus, you would need to sell 6 contracts.

33. Assume that you manage a $2 million portfolio that pays no dividends, has a beta of 1.25 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1300. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

The hedge ratio is [$2M/(1300x250)] x 1.25 = 7.69. Thus, you would need to sell 8 contracts.

34. Assume that you manage a $2 million portfolio that pays no dividends, has a beta of 1.3 and an alpha of 2% per month. Also, assume that the risk-free rate is 0.05% (per month) and the S&P 500 is at 1500. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

The hedge ratio is [$2M/(1500x250)] x 1.3 = 6.93. Thus, you would need to sell 7 contracts.

31. Assume that you manage a $3 million portfolio that pays no dividends, has a beta of 1.45 and an alpha of 1.5% per month. Also, assume that the risk-free rate is 0.025% (per month) and the S&P 500 is at 1220. If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

The hedge ratio is [$3M/(1220x250)] x 1.45 = 14.26. Thus, you would need to sell 14 contracts.

Which one of the following statements is true?

The maintenance margin determines the value of the margin account below which the holder of a futures contract receives a margin call.

Which of the following statements is most false?

The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract, a margin deposit can only be met with cash, and all futures contracts require the same margin deposit

Which of the following is false about profits from futures contracts?

The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made; it is possible for both the holder of the long position and the holder of the short position to earn a profit; and the clearinghouse makes most of the profit

Why do option market-makers have to adjust their delta-hedges every day even if their option portfolio does not change?

The price and volatility of the underlying can change, requiring rebalancing. Additionally, time to maturity decreases as time passes.

The price/earnings ratio, or multiplier approach, may be used for stock valuation. Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.

The price earnings ratio used for stock valuation should be the predicted price/earnings ratio. That is, the ratio of the current price of the stock divided by the expected earnings per share for the coming year. Thus, the ratio is the stock price as a percentage of expected earnings. All valuation models should be based on what the investor is expecting to receive in the coming period, not upon what past investors have received. Such a forecasted price/earnings ratio is published in Value Line. The analyst/investor can simplistically multiply the value of that published ratio by the forecasted earnings per share (also published by Value Line), the forecasted earnings per share numbers cancel out; the result being the intrinsic value of the stock: PO/e1X e1= PO.

The interest rate risk of a bond is

The risk that arises from the uncertainty of the bond's return caused by changes in interest rates

__________ of the cash flow generated by the firm's operations, investments and financial activities.

The statement of cash flows is a report

Other things equal, the price of a stock call option is positively correlated with which of the following factors?

The stock price, time to expiration, and stock volatility The exercise price is negatively correlated with the call option price.

Portfolio A consists of 500 shares of stock and 500 calls on that stock. Portfolio B consists of 800 shares of stock. The call delta is 0.6. Which portfolio has a higher dollar exposure to a change in stock price?

The two portfolios have the same exposure

The two portfolios have the same exposure. 500 calls (0.6) = 300 shares + 500 shares = 800 shares; 800 shares = 800 shares.

The weak form of the efficient market hypothesis contradicts

The weak form of the efficient market hypothesis contradicts technical analysis, but is silent on the possibility of successful fundamental analysis.

Why are they called "anomalies"?

These strategies produce returns that are not proportional to risk as measured by traditional asset pricing models such as the CAPM for Fama-French 3 Factor model. These abnormal returns seem to violate EMH.

Ceteris paribus, the duration of a bond is positively correlated with the bond's

Time to Maturity

___________ is equal to the total market value of the firm's common stock divided by (replacement cost of the firm's assets less liabilities).

Tobin's Q

Many different debt, or financial leverage, ratios are reported. Explain the relationship between total assets/equity and debt/equity.

Total assets/equity is the ratio used in computing the ROE in the "duPont breakout formula". Assets may be purchased with either debt or equity or some combination thereof. Thus, the sum of debt and equity financing equals total assets. If one is given the debt/equity ratio and needs the total assets/equity ratio (for example, for the above cited calculation), one merely adds the amounts of debt and equity in the capital structure in order to obtain the amount of total assets. For example: Debt = $50,000; Equity = $50,000; Debt/equity = 1; $50,000 + $50,000 = $100,000 (total assets); Total assets/Equity = $100,000/$50,000 = 2; or 1 + 1 = 2.

Which of the following is(are) example(s) of interest rate futures contracts?

Treasury bonds and Eurodollars

Which of the following is/are example(s) of interest rate futures contracts? A. Corporate bonds. B. Treasury bonds. C. Eurodollars. D. Treasury bonds and Eurodollars E. Corporate bonds and Treasury bonds

Treasury bonds and Eurodollars

According to the expectations hypothesis, an upward sloping yield curve implies that interest rates are expected to increase in the future

True

An upward sloping yield curve may reflect the confounding of the liquidity premium with interest rate expectations

True

Convertible bonds give the investor the ability to share in the price appreciation of the company's stock

True

Duration is a better measure of interest rate risk of a bond than is time to maturity

True

Swaps allow firms to restructure balance sheets

True

The Black-Scholes formula assumes that the risk-free interest rate and the stock price volatility are both constant over the life of an option

True

The most appropriate discount rate to use when applying a FCFF valuation model is the

WACC.

61. Use the two-state put option value in this problem. SO= $100; X = $120; the two possibilities for STare $150 and $80. The range of P across the two states is _____; the hedge ratio is _______.

When ST = $150; P = $0; when ST =$80: P = $40; ($0 - $40)/($150 - $80) = -4/7. $0 and $40; -4/7

102. Suppose that you purchased a call option on the S&P 100 index. The option has an exercise price of 680 and the index is now at 720. What will happen when you exercise the option?

When an index option is exercised the writer of the option pays cash to the option holder. The amount of cash equals the difference between the exercise price of the option and the value of the index. In this case, you will receive 720-680=40 times the $100 multiplier, or $4,000. In other words, you are implicitly buying the index for 680 and selling it to the call writer for 720. $4,000

SELL AT PAR VALUE

YTM=COUPON

50. You have a record of an analyst's past forecasts of alpha. Describe how you would use this information within the context of the Treynor-Black model to determine the forecasting ability of the analyst.

You can use the index model and valid estimates of beta, you can estimate the ex-post alphas from the average realized return and the return on the market index. The equation is . Then you would estimate a regression of the forecasted alphas on the realized alphas as in the equation . The coefficients a0 and a1 reflect the bias in the forecasts. If there is no bias a0=0 and a1=1. The forecast errors are uncorrelated with the true alpha, so the variance of the forecast is . To measure the value of the forecast, you would use the squared correlation coefficient between the forecasts and the realizations. This can also be determined by the formula . If the analyst has perfect forecasting ability the correlation coefficient will be 1. If the analyst has no ability then the correlation coefficient will be 0. For values in between 0 and 1 you can adjust the forecasts by multiplying by the correlation.

If you took a long position in a pork bellies futures contract and then forgot about it, what would happen at the expiration of the contract?

You would be notified that you owe the holder of the short position a certain amount of cash

If you took a long position in a pork bellies futures contract and then forgot about it, what would happen at the expiration of the contract?

You would be notified that you owe the holder of the short position a certain amount of cash.

25. Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80. Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3. The stock price declines to $100 at the end of year 4, and you sell your 100 shares. For the four years, your geometric average return is

[(1.25)(1.20)(1.25)(0.6667)]1/4 - 1.0 = 5.7%

67. The Value Line Index is an equally weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of 3 stocks where the returns on the 3 stocks during a given period were 32%, 5%, and - 10%, respectively, is __________.

[(1.32)(1.05)(0.90)]1/3 - 1.0 = 7.6%.

21. Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$ and convert the proceeds to U. S. dollars and invest them in the U. S at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures prices (maturity of 1 year). What would be your profit (loss)?

[A$167,000 / 1.67 x 1.04 x 1.66] - (A$167,000 x 1.03) = A$630. Profit of 630 A$

[A$167,000 / 1.67 × 1.04 × 1.66] −(A$167,000 × 1.03) = A$630.

Which of the following items is not specified in a futures contract? I) the contract size II) the maximum acceptable price range during the life of the contract III) the acceptable grade of the commodity on which the contract is held IV) the market price at expiration V) the settlement priceSelect one: a. II and IV .b. I, III, and V c. I and V d. I, IV, and V e. I, II, III, IV, and V

a. II and IV The maximum price range and the market price atexpiration will be determined by the market rather than specified in thecontract

If the stock price increases, the price of a put option on that stock __________ and that of a call option __________. a. decreases, increases b. decreases, decreases c. increases, decreases d. increases, increases e. does not change, does not change

a. decreases, increases

At expiration, the time value of an in the money call option is always a. equal to zero. b. positive. c. negative. d. equal to the stock price minus the exercise price. e. None of these is correct.

a. equal to zero.

The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the call a. is out of the money. b. is in the money. c. can be exercised profitably. d. is out of the money and can be exercised profitably. e. is in the money and can be exercised profitably.

a. is out of the money.

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. a. long; increase b. long; decrease c. short; increase d. long; stay the same e. short; stay the same

a. long; increase

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits.

are not; are option buyers don't have a risk because they don't have a commitment like the sellers do. buyers don't have to exercise, but a seller has the commitment to selling the option.

Conventional theories presume that investors ____________, and behavioral finance presumes that they ____________.

are rational; may not be rational

Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange.

are, are not

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

are, are not

Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange.

are; are not

A put option has an intrinsic value of zero if the option is

at the money and out of the money

b. I, III, and V

A European call option can be exercised a. any time in the future. b. only on the expiration date. c. if the price of the underlying asset declines below the exercise price. d. immediately after dividends are paid. e. None of these is correct.

b. only on the expiration date.

A call has 6 months left before expiration and a put (on the same stock) has 2 months left before expiration. If the company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that a. the call price would increase. b. the call price would decrease. c. the call price would not change. d. the put price would decrease. e. the put price would increase.

b. the call price would decrease.

The interest-rate risk of a bond is a. the risk related to the possibility of bankruptcy of the bond's issuer. b. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. c. the unsystematic risk caused by factors unique in the bond. d. the risk that the bond price will decrease if the interest rate decreases. e. All of these are correct.

b. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.

A hedge ratio for a call is always

between 0 and 1

A hedge ratio for a put is always

between minus one and zero.

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3.At expiration, you break even if the stock price is equal to

both $52 and $68 when looking at the payoff table, we have to add, instead of subtract, both the payoffs from buying the call and the put. the profit for S < 60 comes out to 52 - S, and the profit for S > 60 comes out to S - 68.

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to

both $52 and $68. Call: -$60 + (-$5) + $3 = $68 (break even); Put: -$3 + $60 + (-$5) = $52 (break even); thus, if price increases above $68 or decreases below $52, a profit is realized.

A trin ratio of less than 1.0 is considered as a

bullish signal.

In regard to moving averages, it is considered to be a ____________ signal when market price breaks through the moving average from ____________.

bullish; below

To exploit an expected decrease in interest rates, an investor would most likely

buy Treasury bond futures.

To hedge a short position in Treasury bonds, an investor most likely would

buy interest rate futures

To hedge a short position in Treasury bonds, an investor would most likely

buy interest rate futures

To hedge a short position in Treasury bonds, an investor most likely would

buy interest rate futures.

An American call option allows the buyer to

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

Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise price of $100. Ignoring commissions, the holder of the call option will earn a profit if the price of the share a. increases to $104. b. decreases to $90. c. increases to $106. d. decreases to $96. e. None of these is correct.

c. increases to $106.

An American call option buyer on a non-dividend paying stock will a. always exercise the call as soon as it is in the money. b. only exercise the call when the stock price exceeds the previous high. c. never exercise the call early. d. buy an offsetting put whenever the stock price drops below the strike price. e. None of these is correct.

c. never exercise the call early.

You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date you mustSelect one: a. buy one May oil futures contract. b. buy two April oil futures contract. c. sell one April oil futures contract. d. sell two April oil futures contract.

c. sell one April oil futures contract. The long position is considered the buyer; to close out the position one must take a reversing position, or sell the contract.

The maximum loss a buyer of a stock call option can suffer is equal to a. the striking price minus the stock price. b. the stock price minus the value of the call. c. the call premium. d. the stock price. e. None of these is correct.

c. the call premium.

Because the DDM requires multiple estimates, investors should

carefully examine inputs to the model and perform sensitivity analysis on price estimates.

The duration of a coupon bond

changes as interest rates and time to maturity change, can only predict price changes accurately for small interest rate changes, and increases as the yield to maturity decreases.

A collar with a net outlay of approximately zero is an options strategy that

combines a put and a call to lock in a price range for a security and uses the gains from sale (writing) of a call to purchase a put

A collar with a net outlay of approximately zero is an options strategy that

combines a put and a call to lock in a price range for a security and uses the gains from sale of a call to purchase a put.

Which of the following items is specified in a futures contract?I) The contract size II) The maximum acceptable price range during the life of the contract III) The acceptable grade of the commodity on which the contract is held IV) The market price at expiration V) The settlement price

contract size, the acceptable grade of commodity on which the contract is held, and the settlement price

Some more "traditional" assets have option-like features; some of these instruments include

convertible bonds, callable bonds, and warrants

Studies of Siamese twin companies find __________, which __________ the EMH.

correct relative pricing; does not support

If interest rate parity does not hold

covered interest arbitrage opportunities will exist and arbitragers will be able to make risk-free profits

If interest rate parity holds

covered interest arbitrage opportunities will not exist

Call options on IBM listed stock options are

created by investors and traded on various exchanges options are merely contracts between buyer and seller and sold on various organized exchanges and the OTC market

Hedging one commodity by using a futures contract on another is called

cross hedging

Hedging a position using futures on another commodity is called

cross hedging.

An example of a liquidity ratio is ______.

current ratio and acid test or quick ratio

Which of the following bonds has the longest duration? a. An 8-year maturity, 0% coupon bond. b. An 8-year maturity, 5% coupon bond. c. A 10-year maturity, 5% coupon bond. d. A 10-year maturity, 0% coupon bond

d. A 10-year maturity, 0% coupon bond

You took a short position in 2 S&P 500 futures contracts at a price of 1608.99and closed the position when the index futures was 1732.26. The contract size is $250 times the S&P 500 future price. You incurred:Select one: a. a loss of $57937. b. a loss of $59170. c. a loss of $60402. d. a loss of $61635. e. none of the above

d. a loss of $61635. You took the short position because you expect the price to fall, and would make a profit if the price did fall. Your profit would be $(1608.99-1732.26)*250*2 = $-61635.Negative value means a loss. Your loss would be $61635.The correct answer is: a loss of $61635

Before expiration, the time value of an at the money put option is always a. equal to zero. b. equal to the stock price minus the exercise price. c. negative. d. positive. e. None of these is correct

d. positive.

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the striking price. a. positively, positively b. negatively, positively c. negatively, negatively d. positively, negatively e. not, not

d. positively, negatively

If you determine that the DAX-30 index futures is overpriced relative to the spot DAX-30 index you could make an arbitrage profit by a. buying all the stocks in the DAX-30 and selling put options on the DAX-30 index. b. selling short all the stocks in the DAX-30 and buying DAX-30 futures. c. selling all the stocks in the DAX-30 and buying call options on the DAX-30 index. d. selling DAX-30 index futures and buying all the stocks in the DAX-30. e. None of these is correct.

d. selling DAX-30 index futures and buying all the stocks in the DAX-30.

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by a. buying all the stocks in the S&P 500 and selling put options on the S&P 500 index. b. selling short all the stocks in the S&P 500 and buying S&P Index futures. c. selling all the stocks in the S&P 500 and buying call options on the S&P 500 index. d. selling S&P 500 Index futures and buying all the stocks in the S&P 500. e. None of these is correct.

d. selling S&P 500 Index futures and buying all the stocks in the S&P 500.

All the inputs in the Black-Scholes Option Pricing Model are directly observable except a. the price of the underlying security. b. the risk free rate of interest. c. the time to expiration. d. the standard deviation of returns of the underlying asset return. e. None of these is correct.

d. the standard deviation of returns of the underlying asset return.

62. Use the Black-Scholes Option Pricing Model for the following problem. Given: SO= $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily); σ = 0.020506 (daily). No dividends will be paid before option expires. The value of the call option is _______.

d2 = 0.1530277 - (0.020506)(70)1/2 = -0.01853781; N(d1) = 0.5600; N(d2) = 0.4919; C = 0.5600($70) - $70[e-(0.0001648)(70)]0.4919 = $5.16.

Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true? a. If the market yield increases by 1% the bond's price will decrease by approximately $60. b. If the market yield increases by 1% the bond's price will increase by approximately $50. c. If the market yield increases by 1% the bond's price will decrease by approximately $50. d. If the market yield increases by 1% the bond's price will increase by approximately $60. e. None of these is correct.

dP/P ~ -dY * D* =-1% * 6 =-6% a. If the market yield increases by 1% the bond's price will decrease by approximately $60.

If the interest rate on debt is higher than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

decrease the ROE If ROA is less than the interest rate, then ROE will decline by an amount that depends on the debt to equity ratio.

Buyers of put options anticipate the value of the underlying asset will __________, and sellers of call options anticipate the value of the underlying asset will ________.

decrease; decrease

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________.

decrease; decrease buyers of put options want the value of the asset to decrease so they can increase the value of their call. sellers of call options want the asset value to decrease so the option will expire worthless (writers profit in the opposite way that buyers do)

If the stock price increases, the price of a put option on that stock __________ and that of a call option __________.

decreases, increases

The hedge ratio of an option is also called the option's

delta

Arbitrage proofs in futures market pricing relationships

demonstrate how investors can exploit misalignments.

In a futures contract the futures price is

determined by the buyer and the seller when they initiate the contract

Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange.

determined by the buyer and the seller when they initiate the contract.

In a futures contract the futures price is

determined by the buyer and the seller when they initiate the contract.

Modest and Sundaresan (1983) investigated futures prices and found

deviations from theoretical prices were occasionally larger than transactions costs.

Forward rates ____________ future short rates because ____________.

differ from; they are imperfect forecasts Forward rates are the estimates of future short rates extracted from yields to maturity but they are not perfect forecasts because the future cannot be predicted with certainty; therefore they will usually differ.

Since deltas change as stock values change, portfolio hedge ratios must be constantly updated in active markets. This process is referred to as

dynamic hedging

Barber and Odean (2001) report that women __________ men.

earn higher returns than

Barber and Odean (2001) report that men __________ women.

earn lower returns than

DeBondt and Thaler believe that high P/E result from investors'

earnings expectations that are too extreme.

Covered interest arbitrage ____________.

ensures that currency futures prices are set correctly

Covered interest arbitrage

ensures that currency futures prices are set correctly.

The duration of a 20-year zero-coupon bond is

equal to 20. Duration of a zero-coupon bond equals the bond's maturity.

At expiration, the time value of an at-the-money call option is always

equal to zero

At expiration, the time value of an at-the-money put option is always

equal to zero

At expiration, the time value of an in-the-money call option is always

equal to zero

At expiration, the time value of an in-the-money put option is always

equal to zero

Behavioral finance argues that

even if security prices are wrong, it may be difficult to exploit them and the failure to uncover successful trading rules or traders cannot be taken as proof of market efficiency.

Studies of equity carve-outs find __________, which __________ the EMH.

evidence against the law of one price; violates

The maximum loss the writer of a stock put option can suffer is equal to

exercise price - put premium

Markets would be inefficient if irrational investors __________ and actions of arbitragers were __________.

existed; limited

The most recently established category of futures contracts is

financial futures.

All else equal, call option values are lower

for high dividend payout policies

All else equal, call option values are higher

for low dividend payout policies

Foreign Exchange Futures markets are __________ and the Foreign Exchange Forward markets are _________.

formal; informal

Foreign Exchange Futures markets are __________ and the Foreign Exchange Forward markets are __________.

formal; informal

framing

Dividend discount models and P/E ratios are used by __________ to try to find mispriced securities.

fundamental analysts

The establishment of a futures market in a commodity should not have a major impact on spot prices because

futures are a zero-sum game

The establishment of a futures market in a commodity should not have a major impact on spot prices because

futures are a zero-sum game

Many stock analysts assume that a mispriced stock will

gradually approach its intrinsic value over several years.

The elasticity of a stock call option is always

greater than 1

The elasticity of a stock call option is always

greater than one option prices are much more volatile than stock prices, as option premiums are much lower than stock prices.

If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be _______.

greater than the ROE If interest rate = ROA; ROE = (1 − tax rate)ROA; ROA > ROE.

High P/E ratios tend to indicate that a company will _______, ceteris paribus.

grow quickly

Low P/E ratios tend to indicate that a company will _______, ceteris paribus.

grow slowly

Contango

holds that the natural hedgers are the purchasers of a commodity, not the suppliers and is a hypothesis polar to backwardation.

A decrease in the basis will __________ a long hedger and __________ a short hedger.

hurt; benefit

According to the Black-Scholes option-pricing model, two options on the same stock but with different exercise prices should always have the same _________________.

implied volatility

Some economists believe that the anomalies literature is consistent with investors'

inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; and given a probability distribution of returns, they often make inconsistent or suboptimal decisions.

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

increase the ROE

A $1 decrease in a call option's exercise price would result in a(n) __________ in the call option's value of __________ one dollar.

increase, less than

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share

increases to $206

If the stock price decreases, the price of a put option on that stock __________ and that of a call option __________.

increases; decreases

An investor with a long position in Treasury notes future will profit if

interest rate decline

An investor with a short position in Treasury notes futures will profit if

interest rate increase.

If covered interest arbitrage opportunities exist

interest rate parity does not hold and arbitragers will be able to make risk-free profits

If covered interest arbitrage opportunities do not exist

interest rate parity holds

An investor with a long position in Treasury notes futures will profit if

interest rates decline

An investor with a long position in Canada bond futures will profit if

interest rates decline.

An investor with a long position in Treasury notes futures will profit if

interest rates decline.

The _______ is defined as the present value of all cash proceeds to the investor in the stock.

intrinsic value

Rubinstein (1994) observed that the performance of the Black-Scholes model had deteriorated in recent years, and he attributed this to

investor fears of another market crash

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of -1.2% yesterday. This suggests that

investors expected the earnings increase to be larger than what was actually announced. Anticipated earnings changes are impounded into a security's price as soon as expectations are formed. Therefore a negative market response indicates that the earnings surprise was negative, that is, the increase was less than anticipated.

A futures contract

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

. A futures contract

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call

is at the money

The current market price of a share of MSI stock is $24. If a call option on this stock has a strike price of $24, the call

is at the money

The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call

is in the money and sells for more than if the market price is $40 (an out of the money option)

The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call

is in the money and sells for more than if the market price is $70 (an at the money option)

Credit risk in the swap market

is limited to the difference between the values of the fixed rate and floating rate obligations.

Delivery of stock index futures

is made by a cash settlement based on the index value

Delivery of stock index futures

is made by a cash settlement based on the index value.

The current market price of a share of Disney stock is $60. If a call option on this stock has a strike price of $65, the call

is out of the money

The current market price of a share of JNJ stock is $60. If a put option on this stock has a strike price of $55, the put

is out of the money and sells for a lower price than if the market price of JNJ stock is 50 (an in the money option)

The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put

is out of the money and sells for a lower price than if the market price of the stock is $75 (in the money)

The current market price of a share of Disney stock is $60. If a call option on this stock has a strike price of $65, the call

is out of the money.

The expectations hypothesis of futures pricing

is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset

Immunization is not a strictly passive strategy because

it requires frequent rebalancing as maturities and interest rates change. As time passes the durations of assets and liabilities fall at different rates, requiring portfolio rebalancing. Further, every change in interest rates creates changes in the durations of portfolio assets and liabilities.

If Sure's intrinsic value is $21.00 today, what must be its growth rate?

k = .04 + 1.25 (.14 - .04); k = .165; .165 = 2/21 + g; g = .07

Stoll and Whaley (1987, 1991) concluded that expiration-day volatility was a result of program trades because

large price swings tended to be reversed on the day following contract expiration.

Barber and Odean (2001) report that women trade __________ frequently than men.

less

If information processing was perfect, many studies conclude that individuals would tend to make __________ decisions using that information due to __________.

less than fully rational; behavioral biases

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

long 0.70 shares for each short call

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

long 0.70 shares for each short call.

A hedge ratio of 0.70 implies that a hedged portfolio should consist of

long 0.70 shares for each short call. The hedge ratio is the slope of the option value as a function of the stock value. A slope of 0.70 means that as the stock increases in value by $1, the option increases by approximately $0.70. Thus, for every call written, 0.70 shares of stock would be needed to hedge the investor's portfolio.

A hedge ratio of 0.85 implies that a hedged portfolio should consist of

long 0.85 shares for each short call

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your strategy is called

long straddle Buying both a put and a call, each with the same expiration date and exercise price, is a long straddle.

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

long; increase

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

long; increase

A trader who has a __________ position in oil futures believes the price of oil will __________ in the future.

long; increase and short; decrease

The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures.

long; short

The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures.

long; short

The dollar change in value of a stock call option is always

lower than the dollar change in the value of the stock.

Historically, P/E ratios have tended to be

lower when inflation has been high.

Suppose that Chicken Express, Inc. has a ROA of 7% and pays a 6% coupon on its debt. Chicken Express has a capital structure that is 70% equity and 30% debt. Relative to a firm that is 100% equity-financed, Chicken Express's Net Profit will be ________ and its ROE will be _______.

lower, higher

Normal backwardation

maintains that for most commodities, there are natural hedgers who desire to shed risk and maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.

The ______ is a common term for the market consensus value of the required return on a stock.

market capitalization rate

Delta neutral

means the portfolio has no tendency to change value as the underlying portfolio value changes

Barber and Odean (2001) report that men trade __________ frequently than women and the frequent trading leads to __________ returns.

more; inferior

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher.

more; less

To the option holder, put options are worth ______ when the exercise price is higher; call options are worth ______ when the exercise price is higher.

more; less The holder of the put would prefer to sell the asset to the writer at a higher exercise price. The holder of the call would prefer to buy the asset from the writer at a lower exercise price.

The elasticity of a stock put option is always

negative

Ceteris paribus, the price and yield on a bond are

negatively related. Bond prices and yields are inversely related.

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price.

negatively, positively

An American call option buyer on a nondividend paying stock will

never exercise the call early

Single men trade far more often than women. This is due to greater ________ among men.

overconfidence

Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to

overconfidence.

A coupon bond is a bond that _____________

pays interest on a regular basis (typically every six months or annually)

Kahneman and Tversky (1973) reported that __________ give too much weight to recent experience compared to prior beliefs when making forecasts.

people

Kahneman and Tversky (1973) report that __________ and __________.

people give too much weight to recent experience compared to prior beliefs; tend to make forecasts that are too extreme given the uncertainty of their information

Before expiration, the time value of an at-the-money call option is usually

positive

Before expiration, the time value of an at-the-money put option is always

positive

Before expiration, the time value of an in-the-money call option is always

positive

Before expiration, the time value of an in-the-money put option is always

positive

A hedge ratio for a call option is ________ and a hedge ratio for a put option is ______.

positive, negative

Lower dividend payout policies have a __________ impact on the value of the call and a __________ impact on the value of the put compared to higher dividend payout policies.

positive, negative

The price of a stock call option is __________ correlated with the stock price and __________ correlated with the striking price.

positively, negatively

The process of marking-to-market

posts gains or losses to each account daily and may result in margin calls.

The price that the buyer of a put option pays to acquire the option is called the

premium

The price that the writer of a call option receives to sell the option is called the

premium

The price that the writer of a put option receives to sell the option is called the

premium

Studies of closed-end funds find __________, which __________ the EMH.

prices at premiums and discounts to NAV; is inconsistent with

In volatile markets, dynamic hedging may be difficult to implement because

prices move too quickly for effective rebalancing, as volatility increases historical deltas are too low, price quotes may be delayed so that correct hedge ratios cannot be computed, volatile markets may cause trading halts

25. The yield on a 1-year bill in the U. K. is 8% and the present exchange rate is 1 pound = U. S. $1.60. If you expect the exchange rate to be 1 pound = U. S. $1.50 a year from now, the return a U. S. investor can expect to earn by investing in U. K. bills is

r(US) = [1 + r(UK)]F0/E0 - 1; [1.08][1.50/1.60] - 1 = 1.25%. 1.25%

An example of ________ is that it is not as painful to have purchased a blue-chip stock that decreases in value, as it is to lose money on an unknown start-up firm.

regret avoidance

Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is

regret avoidance.

The put-call parity theorem

represents the proper relationship between put and call prices, allows for arbitrage opportunities if violated, and may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered

The most appropriate discount rate to use when applying a FCFE valuation model is the

required rate of return on equity

Forecasting errors are potentially important because

research suggests that people overweight recent information.

A measure of asset utilization is _______.

return on total assets measures how efficiently the firm is utilizing assets to generate returns.

21. The beta of an active portfolio is 1.20. The standard deviation of the returns on the market index is 20%. The nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the active portfolio is __________.

s = [(1.2)2(0.2)2 + 0.01]1/2 = [0.0676]1/2 = 26.0%.

22. The beta of an active portfolio is 1.36. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 1.2%. The standard deviation of the returns on the active portfolio is __________.

s = [(1.36)2(0.22)2 + 0.012]1/2 = [0.10152]1/2 = 31.86%.

42. The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is __________.

s = [(1.45)2(0.22)2 + 0.03]1/2 = [0.13176]1/2 = 36.3%.

Assume there is a fixed exchange rate between the Canadian and U. S. dollar. The expected return and standard deviation of return on the U. S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U. S. and Canadian stock markets is 1.5%. 31. If you invested 50% of your money in the Canadian stock market and 50% in the U. S. stock market, the standard deviation of return of your portfolio would be

sP = [(0.5)2(15%)2 + (0.5)2(20%)2 + 2(0.5)(0.5)(1.5)]1/2 = 12.53% 12.53%

How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.

sell 1.714

To exploit an expected increase in interest rates, an investor would most likely

sell Treasury Bond futures

To exploit an expected increase in interest rates, an investor would most likely

sell Treasury bond futures

To hedge a long position in Treasury bonds, an investor most likely would

sell interest rate futures

To hedge a long position in Treasury bonds, an investor most likely would

sell interest rate futures.

You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must

sell one April corn futures

You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date you must

sell one April oil futures contract.

A European call option allows the buyer to

sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date

An American put option allows the holder to

sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price decrease with less risk than short selling the stock

A European put option allows the holder to

sell the underlying asset at the striking price on the expiration date and potentially benefit from a stock price decrease with less risk than short selling the stock

A European put option allows the holder to

sell the underlying asset at the striking price on the expiration date.

Options sellers who are delta-hedging would most likely

sell when markets are falling and buy when markets are rising

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by

selling S&P 500 Index futures and buying all the stocks in the S&P 500

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by

selling S&P 500 Index futures and buying all the stocks in the S&P 500.

semi-strong If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

short; decrease

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

short; decrease

Empirical tests of the Black-Scholes option pricing model

show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks

FCF and DDM valuations should be ____________ if the assumptions used are consistent.

similar for all firms

Conservatism implies that investors are too __________ in updating their beliefs in response to new evidence and that they initially __________ to news.

slow; under react

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are

specified by the future exchanges

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are

specified by the futures exchanges

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are

specified by the futures exchanges.

List major types of derivatives besides options (no need to describe them)

swaps and futures

Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity.

take delivery, make delivery

Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity.

take delivery; make delivery

nvestors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity.

take delivery; make delivery

A put option on the S&P 500 Index will best protect a portfolio

that corresponds to the S&P 500

An inverted yield curve is one

that slopes downward. An inverted yield curve occurs when short-term rates are higher than long-term rates.

Futures contracts are regulated by

the Commodities Futures Trading Corporation

Futures contracts in the U.S. are regulated by

the Commodities Futures Trading Corporation

Futures contracts in the U.S. are regulated by

the Commodities Futures Trading Corporation.

Futures contracts are regulated by

the Commodity Futures Trading Corporation.

Before expiration, the time value of a call option is equal to

the actual call price minus the intrinsic value of the call

Before expiration, the time value of a call option is equal to

the actual call price minus the intrinsic value of the call the time value of an option is the difference between the option's price and the value if the option were to expire immediately. the greater the time to expiration, the greater the time value is (decreases to zero at expiration)

Return on total assets is the product of ______.

the after-tax profit margin and the asset turnover ratio ROA = Net profit margin × Total asset turnover.

Which one of the following statements regarding "basis" is true?

the basis is the difference between the futures price and the spot price; the basis risk is borne by the hedger,; and the basis increases when the futures price increases by more than the spot price.

The maximum loss a buyer of a stock call option can suffer is equal to

the call premium

The maximum loss a buyer of a stock call option can suffer is equal to

the call premium if the option is out of the money, you're not going to exercise it anyway to avoid losing the difference between exercise price and market price

the call price would decrease

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that

the call price would decrease

If a company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that

the call price would decrease Call value moves opposite of strike price and dividends

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to

the call value minus the stock price plus the present value of the exercise price (no dividends in this case) the general formulation for the put-call parity condition (not one that only applies to options that don't pay dividends before expiration): P = C - S0 +PV(X) + PV(dividends)

Delta is defined as

the change in the value of an option for a dollar change in the price of the underlying asset.

A hedge ratio can be computed as ____________.

the change in value of the unprotected position for a given change in the exchange rate divided by the profit derived from one futures position for the same exchange rate

Who guarantees that a futures contract will be fulfilled?

the clearinghouse

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

the clearinghouse.

Dynamic hedging is

the continued updating of the hedge ratio as time passes

Dynamic hedging is

the continued updating of the hedge ratio as time passes.

The main difference between the three forms of market efficiency is that

the definition of information differs. The main difference is that weak form encompasses only historical data, semistrong form encompasses historical data and current public information, and strong form encompasses historical data, current public information, and inside information. All of the other definitions remain the same.

The time value of a call option is I) the difference between the option's price and the value it would have if it were expiring immediately. II) the same as the present value of the option's expected future cash flows. III) the difference between the option's price and its expected future value. IV) different from the usual time value of money concept.

the difference between the option's price and the value it would have if it were expiring immediately and different from the usual time value of money concept.

Other things equal, the price of a stock call option is negatively correlated with which of the following factors?

the exercise price

Other things equal, the price of a stock call option is positively correlated with the following factors except

the exercise price

A call option on a stock is said to be at the money if

the exercise price is equal to the stock price.

A put option on a stock is said to be at the money if

the exercise price is equal to the stock price.

A call option on a stock is said to be in the money if

the exercise price is lower than the stock price

The intrinsic value of an in-the-money put option is equal to

the exercise price minus the stock price

the intrinsic value of an in the money put option is equal to

the exercise price minus the stock price

To adjust for stock splits

the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor

What happens to an option if the underlying stock has a 3-for-1 split?

the exercise price would become 1/3 of what it was and the number of shares would triple

What happens to an option if the underlying stock has a 2-for-1 split?

the exercise price would become half of what it was and the number of shares would double

Other things equal, the price of a stock call option is positively correlated with the following factors except

the exercise price/strike price. The exercise price is negatively correlated with the call option price.

All of the following factors affect the price of a stock option

the expected rate of return on the stock. The risk-free rate, riskiness of the stock, and time to expiration are directly related to the price of the option; the expected rate of return on the stock does not affect the price of the option.

A firm has a market to book value ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies _______.

the firm has a higher P/E ratio than other firms in the industry The relationship P/E = (P/B)/ROE indicates that A is possible.

A firm has a lower asset turnover ratio than the industry average, which implies

the firm is utilizing assets less efficiently than other firms in the industry.

A firm has a higher asset turnover ratio than the industry average, which implies

the firm is utilizing assets more efficiently than other firms in the industry.

The break-even interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-q-period zero-coupon bond rolled over into a one-year bond in year n is defined as _________

the forward rate

One of the problems with attempting to forecast stock market values is that

the level of uncertainty surrounding the forecast will always be quite high.

The elasticity of the option is

the percentage change in the stock call option price divided by the percentage change in the stock price

Earnings management is

the practice of using flexible accounting rules to improve the apparent profitability of the firm.

Which of the inputs in the Black-Scholes option pricing model are directly observable?

the price of the underlying security, risk-free rate of interest, and time to expiration

A covered call position is

the purchase of a share of stock with a simultaneous sale of a call on that stock (buy the writer) writing a covered call is safe because the seller owns the stock. the only risk is that the stock will be called away, which limits the upside potential

The maximum loss a buyer of a stock put option can suffer is equal to

the put premium

Which of the following factors affect the price of a stock option?

the risk free rate, the riskiness of the stock, the time to expiration

Volatility risk is

the risk incurred from unpredictable changes in volatility

The Black-Scholes formula assumes that

the risk-free interest rate is constant over the life of the option, the stock price volatility is constant over the life of the option, there will be no sudden extreme jumps in stock prices

Vega is defined as

the sensitivity of an option's price changes in volatility

Vega is defined as

the sensitivity of an option's price to changes in volatility

In the equation Profits = a + b*($/₤ exchange rate), b is a measure of

the sensitivity of profits to the exchange rate

In the equation Profits = a + b*($/₤ exchange rate), b is a measure of

the sensitivity of profits to the exchange rate.

A firm's earnings per share increased from $10 to $12, dividends increased from $4.00 to $4.80, and the share price increased from $80 to $90. Given this information, it follows that

the stock experienced a drop in the P/E ratio.

Other things equal, the price of a stock put option is negatively correlated with which of the following factors?

the stock price

Other things equal, the price of a stock put option is positively correlated with the following factors except

the stock price

the intrinsic value of an in the money call option is equal to

the stock price minus the exercise price

All the inputs in the Black-Scholes option pricing model are directly observable except

the variance of returns of the underlying asset return

If prices are correct, __________, and if prices are not correct, __________.

there are no easy profit opportunities; there are no easy profit opportunities

One reason swaps are desirable is that

they offer participants easy ways to restructure their balance sheets.

Kahneman and Tversky (1973) reported that people give __________ weight to recent experience compared to prior beliefs when making forecasts. This is referred to as ____________.

too much; memory bias

Speculators may use futures markets rather than spot markets because

transactions costs are lower in futures markets and futures markets provide leverage.

Errors in information processing can lead investors to misestimate

true probabilities of possible events and associated rates of return.

In periods of inflation, accounting depreciation is __________ relative to replacement cost and real economic income is ________.

understated, overstated

The potential loss for a writer of a naked call option on a stock is

unlimited if the buyer of the option chooses to exercise the call and buy the stock at the exercise price, the writer of the option must go into the open market and buy the stock (at the market price) to sell it back to the person they are selling to. but because the potential market price of a stock is unlimited, the losses are unlimited

24. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 16%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio is __________.

wO = [1%/1%]/[(16% - 8%)/4%] = 0.5; w* = 0.5/[1 + (1 - 1.05)0.5] = 0.513, or 51.3%.

43. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 11%. The variance of return on the market portfolio is 6%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 4%. The beta of the active portfolio is 1.1. The optimal proportion to invest in the active portfolio is __________.

wO = [1%/2%]/[(11% - 4%)/6%] = .4286, or 42.86%; w* = .4286/[1 + (1-1.1).4286] = 0.4478.

45. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 12%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio is __________.

wO = [2%/2%]/[(12% - 3%)/4%] = 0.444; w* = 0.444/[1 + (1 - 1.15) 0.444] = .476., or 47.6%.

44. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 10%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio is __________.

wO = [3%/2%]/[(10% - 3%)/4%] = 0.857; w* = 0.857/[1 + (1 - 1.15)0.857] = .983., or 98.3%.

The goal of fundamental analysts is to find securities

whose intrinsic value exceeds market price.

will be less than the intrinsic value of stock B.

For most firms, P/E ratios and risk

will have an inverse relationship.

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680 and the index is now at 1,720. What will happen when you exercise the option?

you will receive 4000 we're calculating profit here. (1720-1680)*100 = 4000

The intrinsic value of an OTM call options is equal to

zero

The intrinsic value of an out-of-the-money call option is equal to

zero

The intrinsic value of an out-of-the-money put option is equal to

zero

the intrinsic value of an out of the money call option is equal to

zero

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.If, at expiration, the price of a share of WFM stock is $103, your profit would be

zero because 103 < 105, we will not exercise writing the call. so profit: S - 100 - (5-2) 103 - 100 - (5-2) = 0

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

zero. $103 - $100 = $3 - ($5 - $2) = 0; $0 × 100 = $0

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

none of the above the price that the writer of a put option receives depends on the market price at the time

The open interest on silver futures at a particular time is the

number of all long and short

The open interest on silver futures at a particular time is the

number of all long or short silver futures contracts outstanding.

Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long.

mental accounting

Ceteris Paribus, the higher default probability, the lower the credit spread

False

Ceteris paribus, the duration of a bond is positively correlated with its coupon rate

False

European options are only traded in European countries

False

The duration of a 5-year zero-coupon bond is less than 5

False

The intrinsic value of an out-of-the-money call option is equal to the call premium

False

The option pricing model was first developed by Markowitz

False

The past 200 year history tells us sovereign bond defaults are extremely rare

False

The risk-neutral probability of default calculated from market credit spread tends to underestimate the real probability of default

False

Explain the difference between cash settlement and physical settlement.

For example, consider a future on head of cattle. If it calls for cash settlement, money is simple transferred between parties at expiration. If it calls for physical settlement, the seller literally has to deliver cows to the buyer at the specified location.

Which is the most appropriate term of the bonds issued in Switzerland by an American company and denominated in Swiss francs?

Foreign Bonds

According to James Tobin, the long-run value of Tobin's Q should move toward A. 0. B. 1. C. 2. D. infinity. E. None of the options are correct.

3. _________ is equal to (common shareholders' equity/common shares outstanding). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of these is correct

A. Book value per share

WACC is the most appropriate discount rate to use when applying a ______ valuation model.

FCFF

A European put option allows the holder to potentially benefit from a stock price increase

False

Our professor looks like Mr. Incredible

Yup

Current market price of a share of AT&T Stock is $50. If a call option on this stock has a strike price of $45, the call is ________

In the money

_________ of the profitability of the firm over a period of time such as a year.

The income statement is a summary

The minimum tick size for a CBOE option selling above $3 is ________.

$0.125

32. A firm has an ROE of -2%, a debt/equity ratio of 1.0, a tax rate of 0%, and an interest rate on debt of 10%. The firm's ROA is _______.

-2% = (1) [ROA + (ROA - 10%) 1] = 4%.

The value of a stock put option is positively related to the following factors except

the stock price

The intrinsic value of an in-of-the-money call option is equal to

the stock price minus the exercise price

Other things equal, the price of a stock call option is positively correlated with which of the following factors?

the stock price, time to expiration, and stock volatility

Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index?

$1524.25

37. You purchased one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

$2.10 - $2.29 = -$0.19 X 5,000 = -$950. $950 loss

On January 1, you sold one April S&P 500 index futures contract at a futures price of 420. If on February 1 the April futures price were 430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

$2500 LOSS

Each of two stocks, C and D, are expected to pay a dividend of $3 in the upcoming year. The expected growth rate of dividends is 9% for both stocks. You require a rate of return of 10% on stock C and a return of 13% on stock D. The intrinsic value of stock C A. will be greater than the intrinsic value of stock D. B. will be the same as the intrinsic value of stock D. C. will be less than the intrinsic value of stock D. D. cannot be calculated without knowing the market rate of return

Fly Boy Corporation is expected have EBIT of $800k this year. Fly Boy Corporation is in the 30% tax bracket, will report $52,000 in depreciation, will make $86,000 in capital expenditures, and will have a $16,000 increase in net working capital this year. What is Fly Boy's FCFF? A. 510,000 B. 406,000 C. 542,000 D. 596,000 E. 682,000

High P/E ratios tend to indicate that a company will _______, ceteris paribus. A. grow quickly B. grow at the same speed as the average company C. grow slowly D. not grow E. None of the options are correct.

Low Tech Company has an expected ROE of 10%. The dividend growth rate will be ________ if the firm follows a policy of paying 40% of earnings in the form of dividends. A. 6.0% B. 4.8% C. 7.2% D. 3.0%

Which of the following bonds has the longest duration? A 12-year maturity, 0% coupon bond. A 12-year maturity, 8% coupon bond. A 4-year maturity, 8% coupon bond. A 4-year maturity, 0% coupon bond.

A 12-year maturity, 0% coupon bond. The longer the maturity and the lower the coupon, the greater the duration.

Describe the protective put. What are the advantages of such a strategy?

A protective put is a risk-management strategy that investors can use to protect themselves against adverse market change, specifically the loss of unrealized gains in an asset such as a stock. Protective puts provide a form of portfolio insurance against stock price declines in that they can limit losses, whereby the investor's portfolio is protected at levels below the strike price of the put. Additionally, premiums for this option are generally low.

Which one of the following statements regarding "basis" is not true?

A short hedger suffers losses when the basis decreases.

Holding other factors constant, which one of the following bonds is the least volatile?

A) 5-year, 0% coupon bond B) 5-year, 8% coupon bond C) 5-year, 10% coupon bond D) 3-year, 10% coupon bond

__________ can lead investors to misestimate the true probabilities of possible events or associated rates of return. A. Information processing errors B. Framing errors C. Mental accounting errors D. Regret avoidance

A) Information processing errors

A) any time on or before the expiration date A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time; whereas an American may be exercised at any time before the expiration date. That said, Asian options differ from both in that its payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time.

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The total value of the equity of Utica Manufacturing Company should be A. $1,000,000. B. $2,000,000. C. $3,000,000. D. $4,000,000.

B. -$850 = -800 + (-100 x .5) = -850

What should be the proper futures price for a 1-year contract? A. 1.703 A$/$ B. 1.654 A$/$ C. 1.638 A$/$ D. 1.778 A$/$ E. 1.686 A$/$

B. 1.654 A$/$ 1.03/1.04(1.67 A$/$) = 1.654 A$/$.

Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 cents per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 cents per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the total cost of Firm C will be _______. A. $1,680,000B. $1,170,000C. $750,000D. $420,000E. None of these is correct.

B. $1,170,000 1,400,000($.30) +$750,000 = $1,170,000

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that A. the call price would increase B. the call price would decrease C. the call price would not change D. the put price would decrease E. the put price would not change

B. the call price would decrease

Dynamic hedging is __________. A. the volatility level for the stock that the option price implies B. the continued updating of the hedge ratio as time passes C. the percentage change in the stock call option price divided by the percentage change in the stock price D. the sensitivity of the delta to the stock price

B. the continued updating of the hedge ratio as time passes Dynamic hedgers will convert equity into cash in market declines to adjust for changes in option deltas.

58. The Option Clearing Corporation is owned by A. the Federal Reserve System. B. the exchanges on which stock options are traded. C. the major U.S. banks. D. the Federal Deposit Insurance Corporation.

B. the exchanges on which stock options are traded.

92. For most firms, P/E ratios and risk A. will be directly related. B. will have an inverse relationship. C. will be unrelated. D. will both increase as inflation increases. E. None of these is correct.

B. will have an inverse relationship.

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, D, with a 2-year-to-maturity and a 8% coupon rate. 2) A zero-coupon bond, E, with a 2-year-to-maturity and a 8% yield to maturity.

Bond E because of the longer duration. Duration is the best measure of bond price sensitivity; the longer the duration the higher the price sensitivity.

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metrics's stock? A. 0.8 B. 1.0 C. 1.1 D. 1.4 E. None of the options are correct

SI International had a FCFE of $122.1M last year and has 12.43M shares outstanding. SI's required return on equity is 11.3%, and WACC is 9.8%. If FCFE is expected to grow at 7.0% forever, the intrinsic value of SI's shares is A. $108.00. B. $68.29. C. $244.43. D. $14.76.

The present value of growth opportunities (PVGO) is equal to 18-46 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. I) the difference between a stock's price and its no-growth value per share. II) the stock's price. III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities. A. I and IV B. II and IV C. I, III, and IV D. II, III, and IV E. III and IV

You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value of stock C A. will be greater than the intrinsic value of stock D. B. will be the same as the intrinsic value of stock D. C. will be less than the intrinsic value of stock D. D. will be the same or greater than the intrinsic value of stock D. E. None of the options are correct.

preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.39 B. $0.56 C. $31.82 D. $56.25

High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be A. $1.00B. $2.50C. $2.69D. $2.81E. None of these is correct

C. $2.69 G= (.125 * .6)+2.50

The premium on one WFM February 90 call contract is Stock Price: 92 7/8, 92 7/8, 92 7/8 Strike Price: 85, 90, 95 February: 8 7/8, 4 1/8, 1 5/8 A. $4.1250 B. $418.00 C. $412.50 D. $158.00

C. $412.50 4 1/8 = $4.125 × 100 = $412.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

The market capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13% and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be _______. A. 7.69B. 8.33C. 9.09D. 11.11E. None of these is correct

C. 9.09 g = 13% × 0.5 = 6.5%; .5/(.12 − .065) = 9.09

31. Which one of the following statements regarding "basis" is not true? A. The basis is the difference between the futures price and the spot price. B. The basis risk is borne by the hedger. C. A short hedger suffers losses when the basis decreases. D. The basis increases when the futures price increases by more than the spot price. E. None of these is true.

C. A short hedger suffers losses when the basis decreases.

14. ___________ the return on a stock beyond what would be predicted from market movements alone. A. An irrational return is B. An economic return is C. An abnormal return is D. An irrational return and an economic return are E. An irrational return and an abnormal return are

C. An abnormal return is

97. The present value of growth opportunities (PVGO) is equal to I) the difference between a stock's price and its no-growth value per share. II) the stock's price. III) zero if its return on equity equals the discount rate. IV) the net present value of favorable investment opportunities. A. I and IV B. II and IV C. I, III, and IV D. II, III, and IV E. III and IV

C. I, III, and IV

. Which of the following are used by fundamental analysts to determine proper stock prices? I) trendlines II) earnings III) dividend prospects IV) expectations of future interest rates V) resistance levels A. I, IV, and V B. I, II, and III C. II, III, and IV D. II, IV, and V E. All of the items are used by fundamental analysts.

C. II, III, and IV Analysts look at fundamental factors such as earnings, dividend prospects, expectation of future interest rates, and risk of the firm. The information is used to determine the present value of future cash flows to stockholders. Technical analysts use trendlines and resistance levels.

According to Michael Porter, there are five determinants of competition. An example of _____ is when the availability limits the prices that can be charged to customers. A. Threat of EntryB. Rivalry between Existing CompetitorsC. Pressure from Substitute ProductsD. Bargaining power of BuyersE. Bargaining power of Suppliers

C. Pressure from Substitute Products

With regard to futures contracts, what does the word "margin" mean? a) It is the amount of the money borrowed from the broker when you buy the contract. b)It is the maximum percentage that the price of the contract can change before it is marked to market. c) It is the maximum percentage that the price of the underlying asset can change before it is marked to market. d)It is a good-faith deposit made at the time of the contract's purchase or sale. e) It is the amount by which the contract is marked to market.

________ is equal to the total market value of the firm's common stock divided by (the replacement cost of the firm's assets less liabilities). A. Book value per share B. Liquidation value per share C. Market value per share D. Tobin's Q E. None of the options are correct

Suppose that the risk-free rates in the United States and in the Canada are 3% and 5%, respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs. A. $1.00/ C$ B. $1.70/ C$ C. $0.88/ C$ D. $0.78/ C$ E. $1.22/ C$

D. $0.78/ C$ $.80(1.03/1.05) = $0.78/C$

D. $1.63/BP $1.60(1.06/1.04) = $1.57/BP

A preferred stock will pay a dividend of $1.25 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $11.56B. $9.65C. $11.82D. $10.42E. None of these is correct

D. $10.42 1.25/.12=10.42

Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 cents per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 cents per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the tax of Firm C will be _______. A. $1,680,000B. $750,000C. $510,000D. $204,000E. None of these is correct.

D. $204,000

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call? A. $8 B. $12 C. $0 D. $4 E. Cannot be determined without more information

D. $4 12 - (43 - 35) = $4.

You purchase one June 70 put contract for a put premium of $4. What is the maximum profit that you could gain from this strategy? A. $7,000 B. $400 C. $7,400 D. $6,600 E. None of these is correct

D. $6,600 -400 + 7,000 = 6,600

Risk Metrics Company is expected to pay a dividend of $3.50 in the coming year. Dividends are expected to grow at a rate of 10% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The stock is trading in the market today at a price of $90.00. What is the approximate beta of Risk Metric's stock? A. 0.8 B. 1.0 C. 1.4 D. 1.1 E. None of the options

D. 1.1 13.9=.05+B(.13-.05)=1.1

68. All of the following factors affect the price of a stock option except

D. the expected rate of return on the stock.

Which of the following variables influence the value of options I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

I, II, III, and IV

Which one of the following variables influence the value of put options? I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

I, II, III, and IV

Consider a 10-year bond with a 10% coupon that has a present yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be higher/the same/lower/cannot tell?

Since the coupon rate is below the yield, this bond must be selling at a discount. As time progresses, the value of the bond will increase as time passes (holding all else constant).

What happens to an option if the underlying stock has a 2-for-1 split?

The exercise price would become one-half of what it was, and the number of options held would double.

[(12.50 - 12)/12]/[(44 - 43)/43] = 1.79.

b. I, III, and V The maximum price range and the market price at expiration will be determined by the market rather than specified in the contract.

The confidence index is computed from ____________, and higher values are considered ____________ signals.

bond yields; bullish

increases to $506 $505 is the breakeven; anything greater than this would earn a profit

If the stock price decreases, the price of a put option on that stock __________ and that of a call option __________.

increases, decreases

A swap

obligates two counterparties to exchange cash flows at one or more future dates, allows participants to restructure their balance sheets, and allows a firm to convert outstanding fixed rate debt to floating rate debt.

A European call option can be exercised

only on the expiration date

A European put option can be exercised

only on the expiration date

Before expiration, the time value of an at-the-money call option is always

positive

The Option Clearing Corporation is owned by

the exchanges on which stock options are traded

The Option Clearing Corporation is owned by

the exchanges on which stock options are traded, in order to facilitate option trading

The value of a stock put option is positively related to the following factors except

the stock price. The time to expiration and striking price are positively related to the value of a put option; the stock price is inversely related to the value of the option.

Protective puts offer an advantage over stop-loss orders in that

the stop-loss order will be executed as soon as the stock price reaches the trigger price, without allowing for a subsequent rebound, while the put allows the holder to wait the stop-loss order may actually be executed at a price below the trigger price

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

the strike price or the exercise price

Other things equal, the price of a stock put option is positively correlated with which of the following factors?

Final Exam

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