Wealth Management Exam 3

9. The duration of a bond is a function of its: (1) Current price (2) Time to maturity (3) Yield to maturity (4) Coupon rate

(1), (2), (3) and (4)

13. Sarah Dunham has invested $30,000 in a bond that has a coupon of 8% and yield to maturity of 7%. The bond's duration is 12.8 years. What price change can Sarah expect from an increase of 1% in interest rates?

= -D x (change in y / 1 + y) = -(12.8) x (.01/1+.07) -11.96%

8. The following set of newly issued debt instruments was purchased for a portfolio: Treasury bond Zero-coupon bond Corporate bond Municipal bond The respective maturities of these investments are approximately equivalent. Which one of the investments in the preceding set would be subject to the greatest relative amount of price volatility if interest rates were to change quickly?

Zero-coupon bond

33. Jim began purchasing shares of the ERT stock mutual fund several years ago. He has followed a dollar-cost averaging approach by investing $700 each year for 4 years. The following data depict Jim's purchases: Year Fund Price 1 $10.25 2 $20.15 3 $15.60 4 $17.35 What is Jim's average cost per share for this fund?

a. Year $ Investment / Fund Price = # of Shares 1 $700 / 10.25 = 68.29 2 $700 / 20.15 = 34.74 3 $700 / 15.60 = 44.87 4 $700 / 17.35 = 40.35 _________ __________ $2,800 188.25 $2,800/188.25 = $14.87 $14.87

30. A call option with a strike price of 110 is selling for 3.50 when the market price of the underlying stock is 108. The intrinsic value of the call is:

a. 0.00

7. Bond A has a 6% annual coupon and is due in 2 years. Its value in today's market is $900. Bond B has a 10% annual coupon and is due in 4 years. It is priced to yield 12%. Bond C is a 9% zero-coupon bond priced to yield 11% in 8 years. Assuming that the duration of Bond A is 1.94 years, which of the following statements about the effect of a 1% decline in interest rates is true?

a. Bond C, having a longer duration than Bond A, would have a larger percent increase in price than Bond A.

27. Campbell has a put option with a strike price of $30. The stock subject to the option is currently selling for $27. In this situation:

a. The option has an intrinsic value of $3 because it is "in the money"

25. Which of the following statements concerning the writing of a covered call option are correct? (1) any loss on the long position in hte stock will be reduced by the dollars received for the sale of the call. (2) If the market price of the stock increases to one-half of a point above the strike price, the writer would have been better off not selling the call. (3) the writer reduces his or her downside risk but gives up possible upside opportunity. (4) The premium received is considered a return of capital

b. (1) and (3) only

4. A client has a cash need at the end of seven years. Which of the following investments might initially immunize the portfolio? (1) A 9-year maturity coupon bond (2) A 7-year maturity coupon Treasury-note (3) A series of Treasury bills

b. (1) only

5. Which of the following statements concerning a bond's duration is not correct? a. If a bond has a high coupon, its duration will be lower than a similar one with a low coupon. b. If a bond has a long maturity, its duration will be lower than a similar one with short maturity. c. The duration of a zero-coupon bond is equal to its years to maturity. d. For most bonds, duration is less than their years to maturity. e. A bond with a low duration has a lower susceptibility to interest rate risk than a similar bond with a high duration.

b. If a bond has a long maturity, its duration will be lower than a similar one with short maturity.

15. Which of the following statements concerning duration is correct? a. If interest rates increase, duration for an investor's bond portfolio will increase. b. If interest rates are expected to rise, an investor should shorten duration of a bond portfolio. c. A zero-coupon bond will not match duration and maturity in future years. d. If the coupon for a bond to be purchases is increased, the duration will increase

b. If interest rates are expected to rise, an investor should shorten duration of a bond portfolio.

20. Jasmine has a large paper profit in her Amalgamated Corporation shares, currently at 46. She is happy with the stock but realizes that a good thing cannot go on forever. If she is willing to sell at 50, what strategy could you reccommend to her?

b. Sell $50 call options

26. Kelly has a call option with a strike price of $30. The stock subject to the option is currently selling for $27. In this situation:

b. The option has an intrinsic value of zero because it is "out of the money"

23. Janet wants to write an uncovered, or naked, call. She will succeed in making income from this strategy if:

b. The price of the stock falls or remains unchanged

31. Which of the following correctly indicates a difference between puts and short sales? a. puts are profitable when stock prices decrease; short sales are profitable when stock prices increase b. puts provide a greater amount of leverage than short sales c. short sales have a shorter time frame than puts d. puts provide more potential for capital loss than short sales

b. puts provide a greater amount of leverage than short sales

31. With the same dollar investment, which of the following strategies can cause the investor to experience the greatest loss? a. selling a naked put option b. selling a naked call option c. writing a covered call d. buying a call option e. buying the underlying security

b. selling a naked call option

28. Which of the following statements concerning the writing of a call option is (are) correct? (1) The writer expects the price of the stock subject to the option to go down. (2) The primary advantage of writing a call option is the revenue produced by selling the option. (3) Writing a naked call option presents a smaller loss potential than writing a covered call option.

c. (1) and (2) only

26. Which of the following are logical reasons for buying a call? (1) to profit when stock prices increase (2) to utilize leverage (3) To generate income in a flat market (4) the hedge against an existing short stock position

c. (1), (2), and (4) only

28. Which of the following are logical reasons for buying a put? (1) to profit when stock prices decrease (2) to utilize leverage (3) to benefit from the income payable periodically (4) to hedge against an existing portfolio

c. (1), (2), and (4) only

22. A client with a well diversified common stock porfolio expresses concern about a possible market decline. However, he/she does not want to incur the cost of selling a portion of his or her holdings nor the risk of mistiming the market. A possible strategy for this client would be:

c. Buy an index put option

1. A client asks a certified financial planner to invest $10 million in two different fixed-income instruments with durations of 5.5 years and 7.4 years, respectively. The client will need all the cash from this investment in 6 years. In order to properly immunize this portfolio, the planner must:

c. Calculate the weighted average of both bonds' durations to match the client's time horizon.

21. Morgan is the owner of a well diversified portfolio of common stocks, but Morgan is concerned that the market may decline soon. He has been advised to buy a put on a market index such as the S&P 500. This this situation:

c. Morgan has been given good advice because if the market declines, the value of his option will rise.

25. George Demos bought 100 shares of GM stock at $30 on 2/15. On 12/1, the stock had risen to $38, so George wrote a 9-month call option, with an exercise price of $40. The premium was $3 per share. The call was exercised just before it expired. What gain will George report for income taxes?

d. $1,300 long-term gain

27. Which of the following are logical reasons for writing a covered call? (1) to profit when stock prices increase (2) to utilize leverage (3) to provide additional income in a flat market (4) to provide additional gain while disposing of a long stock position

d. (3) and (4) only

6. Which of the following investments will negate the need to calculate duration? a. A 15-year bond whose call date is only four years away b. A custodial account with a mixture of equities and bond funds c. A bond fund that minimizes portfolio turnover and is tax-efficient d. A zero-coupon bond that matures in 8 years e. A series of bonds with no call date provisions

d. A zero-coupon bond that matures in 8 years

5. To immunize a bond portfolio over a specific investment horizon, an investor would do which of the following? a. Match the maturity of each bond to the investment horizon b. Match the duration of each bond to the investment horizon c. Match the average-weighted maturity of the portfolio to the investment horizon d. Match the average-weighted duration of the bond portfolio to the investment horizon

d. Match the average-weighted duration of the bond portfolio to the investment horizon

21. Dan Hope has come to you asking about stock options in general. He is confused about what he has heard about puts and calls. Which of the following statements about puts and calls is not correct? a. Both call and put option writers receive premiums b. A put writer has a positive view of future market movements c. An investor who believes market prices will be stable is likely to write calls d. The seller of a call or put option forfeits the premium once the exercise price has been attained e. The buyer of a call option anticipates a stock price increase

d. The seller of a call or put option forfeits the premium once the exercise price has been attained

30. Which of the following correctly describes a protective put? a. a combo of a put and a call on the same stock with different expiration dates and exercise prices b. a combo of a put and a call on the same stock with the same expiration dates and exercise prices c. sale of a stock short and sale of a put d. purchase of a stock and a put

d. purchase of a stock and a put

29. Stanley writes a put for $8 with a strike price of $30. The stock has a current market price of $28. In this situation which of the following statements is (are) correct? (1) Stanley's expectation is that the market price of the stock is going to plummet (2) Stanley will break even if the market price of the stock settles at $22. (3) Stanley's maximum profit will occur if the market price of the stock reaches $30 or more.

e. (2) and (3) only

20. XYZ stock is selling for $53 per share, and a call option with three-month expiration may be bought for $3 per share, with a strike price of $55. This option may be said to be:

e. Out of the money strike price > current price