Finance 4319 Exam 2

The change in a bond price for a unit change in the prevailing yield is calculated as $198.54. What is the price value of a basis point on this bond? A) $0.019854 B) $0.19854 C) $1.9854 D) $19.854

A) $0.019854

The conversion factor on a deliverable bond is 1.03 and the bond price is 100.50. The observed futures price is 97.5 and the YTM is 5.8%. What is invoice less market price on the security? A) +0.08 B) -0.08 C) -0.02 D) +0.02

A) +0.08

The prices of 1, 2, 3, and 4-year zero coupon government bonds are 95.42, 90.36, 85.16, and 78.81, respectively. What is the continuously compounded 3-year zero yield? A) 5.35% B) 5.85% C) 6.12% D) 6.40%

A) 5.35%

What change in cash flows will occur to the fixed rate payer at settlement, in an interest rate swap agreement, when market interest rates rise? A) An increase in cash received B) A decrease in cash received C) No change in cash received D) It cannot be determined based on the information given

A) An increase in cash received

Which of the following formulas is used to determine the cheapest to deliver? A) Invoice price - market price B) Market price x accrued interest C) Futures price x accrued interest D) Futures price - invoice price

A) Invoice price - market price

Which of the following creates a bull spread? A. Buy a low strike price call and sell a high strike price call B. Buy a high strike price call and sell a low strike price call C. Buy a low strike price call and sell a high strike price put D. Buy a low strike price put and sell a high strike price call

A. Buy a low strike price call and sell a high strike price call

When volatility increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value

A. Both calls and puts increase in value

Which of following describes forward rates? A. Interest rates implied by current zero rates for future periods of time B. Interest rate earned on an investment that starts today and last for n-years in the future without coupons C. The coupon rate that causes a bond price to equal its par (or principal) value D. A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows

A. Interest rates implied by current zero rates for future periods of time

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if they thought A. the stock price would stay above $12. B. the stock volatility would increase. C. the stock price would fall below $18. D. the stock price would stay above $15. E. the stock price would rise above $18 or fall below $12.

A. the stock price would stay above $12.

A put option if purchased and held for 1 year. The Exercise price on the underlying asset is $40. If the current price of the asset is $36.45 and the future value of the original option premium is (- $1.62 ), what is the put profit, if any at the end of the year? A) $1.62 B) $1.93 C) $3.55 D) $5.17

B) $1.93

Which of the following items will a short bond futures position be most interested in at expiration of the futures contract? A) Cash and carry B) Cheapest to deliver C) Conversion factor D) Implied Repo rate

B) Cheapest to deliver

Which of the following creates a bear spread? A. Buy a low strike price call and sell a high strike price call B. Buy a high strike price call and sell a low strike price call C. Buy a low strike price call and sell a high strike price put D. Buy a low strike price put and sell a high strike price call

B. Buy a high strike price call and sell a low strike price call

Bootstrapping involves A. Calculating the yield on a bond B. Working from short maturity instruments to longer maturity instruments determining zero rates at each step C. Working from long maturity instruments to shorter maturity instruments determining zero rates at each step D. The calculation of par yields

B. Working from short maturity instruments to longer maturity instruments determining zero rates at each step

The premium on a call option on the market index with an exercise price of 1050 is $9.30 when originally purchased. After 2 months the position is closed and the index spot price is 1072. If interest rates are 0.5% per month, what is the Call Profit? A) $9.30 B) $9.39 C) $12.61 D) $22.00

C) $12.61

The spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The premium on the long put, with an exercise price of $930, is $8.00. Calculate the profit or loss to the short put position if the final index price is $915. A) $15.00 gain B) $15.00 loss C) $6.90 gain D) $6.90 loss

C) $6.90 gain

A Forward Rate Agreement contains an agreed interest rate of 3.1% on a 6-month loan starting in 6 months. If settled at the time of borrowing, what amount would the borrower pay or receive on a $500,000 loan if the prevailing 6-month interest rate is 2.9%? A) $1,000 payment B) $1,000 receipt C) $972 payment D) $972 receipt

C) $972 payment

The price of a 3-year zero coupon government bond is 85.16. The price of a similar 4-year bond is 79.81. What is the yield to maturity (effective annual yield) on the 4-year bond? A)4.6% B) 5.5% C) 5.8% D) 6.7%

C) 5.8%

The price of a European call option on a stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. A dividend of $1 is expected in six months. What is the price of a one-year European put option on the stock with a strike price of $50? A. $8.97 B. $6.97 C. $3.06 D. $1.12

C. $3.06

An investor has unrealized gains in 100 shares of Amazon stock upon which they do not wish to pay taxes. However, they are now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio? A. $700 B. -$800 C. -$400 D. -$200 E. -$100

C. -$400

When interest rates increase with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value

C. Calls increase in value while puts decrease in value

When the stock price increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value

C. Calls increase in value while puts decrease in value

A European call and a European put on a stock have the same strike price and time to maturity. At 10:00am on a certain day, the price of the call is $3 and the price of the put is $4. At 10:01am news reaches the market that has no effect on the stock price or interest rates, but increases volatilities. As a result the price of the call changes to $4.50. Which of the following is correct? A. The put price increases to $6.00 B. The put price decreases to $2.00 C. The put price increases to $5.50 D. It is possible that there is no effect on the price

C. The put price increases to $5.50

Which of the following describes a PUT option? A. The right to buy an asset for a certain price B. The obligation to buy an asset for a certain price C. The right to sell an asset for a certain price D. The obligation to sell an asset for a certain price

C. The right to sell an asset for a certain price

You have taken a stock option position and if the stock's price increases you could lose a fixed small amount of money, but if the stock's price decreases your gain increases. You must have A. bought a call option B. bought a put option C. written a call option D. written a put option E. purchased a straddle

C. written a call option

The premium on a long term call option on the market index with an exercise price of 950 is $12.00 when originally purchased. After 6 months the position is closed and the index spot price is 965. If interest rates are 0.5% per month, what is the Call Payoff? A) $2.64 B) $12.00 C) $12.36 D) $15.00

D) $15.00

The spot price of the market index is $900. The annual rate of interest on treasuries is 4.8% (0.4% per month). After 3 months the market index is priced at $920. An investor has a long call option on the index at a strike price of $930. What profit or loss will the writer of the call option earn if the option premium is $2.00? A) $2.00 gain B) $2.00 loss C) $2.02 gain D) $2.02 loss

D) $2.02 loss

IBM and AT&T decide to swap $1 million loans. IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan. What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%? A) -$50,000 B) $50,000 C) -$90,000 D) 0

D) 0

The price of a 3-year zero coupon government bond is 85.16. The price of a similar 4-year bond is 78.81. What is the 1-year implied forward rate from year 3 to year 4? A) 4.6% B) 5.5% C) 5.8% D) 6.7%

D) 6.7%

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________. A. $50; $45 B. $55; $55 C. $60; $45 D. $60; $50 E. One cannot tell from the information given.

D. $60; $50

Which of the following is true? A. When interest rates in the economy increase, all bond prices increase B. As its coupon increases, a bond's price decreases C. Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same D. None of the above

D. None of the above

Which of the following is correct? A. A calendar spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different B. A calendar spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different C. A calendar spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different D. A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different

D. A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different

Which of the following describes an interest rate swap? A. A way of converting a liability from fixed to floating B. A portfolio of forward rate agreements C. An agreement to exchange interest at a fixed rate for interest at a floating rate D. All of the above

D. All of the above

When the time to maturity increases with all else remaining the same, which of the following is true? A. European options always increase in value B. The value of European options either stays the same or increases C. There is no effect on European option values D. European options are liable to increase or decrease in value

D. European options are liable to increase or decrease in value

When dividends increases with all else remaining the same, which of the following is true? A. Both calls and puts increase in value B. Both calls and puts decrease in value C. Calls increase in value while puts decrease in value D. Puts increase in value while calls decrease in value

D. Puts increase in value while calls decrease in value

Which of the following is the put-call parity result for a non-dividend-paying stock? A. The European put price plus the European call price must equal the stock price plus the present value of the strike price B. The European put price plus the present value of the strike price must equal the European call price plus the stock price C. The European put price plus the stock price must equal the European call price plus the strike price D. The European put price plus the stock price must equal the European call price plus the present value of the strike price

D. The European put price plus the stock price must equal the European call price plus the present value of the strike price

Since the credit crisis that started in 2007 which of the following have derivatives traders used as the risk-free rate A. The Treasury rate B. The LIBOR rate C. The repo rate D. The overnight indexed swap rate

D. The overnight indexed swap rate

Which of the following describes a protective put? a. A long put option on a stock plus a long position in the stock b. A long put option on a stock plus a short position in the stock c. A short put option on a stock plus a short call option on the stock d. A short put option on a stock plus a long position in the stock

a. A long put option on a stock plus a long position in the stock

How can a straddle be created? a. Buy one call and one put with the same strike price and same expiration date b. Buy one call and one put with different strike prices and same expiration date c. Buy one call and two puts with the same strike price and expiration date d. Buy two calls and one put with the same strike price and expiration date

a. Buy one call and one put with the same strike price and same expiration date

A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true? a. The value of the swap to the company increases b. The value of the swap to the company decreases c. The value of the swap can either increase or decrease d. The value of the swap does not change providing the swap rate remains the same

a. The value of the swap to the company increases

How can a strangle trading strategy be created? a. Buy one call and one put with the same strike price and same expiration date b. Buy one call and one put with different strike prices and same expiration date c. Buy one call and two puts with the same strike price and expiration date d. Buy two calls and one put with the same strike price and expiration date

b. Buy one call and one put with different strike prices and same expiration date

Which of the following are true for CBOE stock options? a. There are no margin requirements b. The initial margin and maintenance margin are determined by formulas and are equal c. The initial margin and maintenance margin are determined by formulas and are different d. The maintenance margin is usually about 75% of the initial margin

b. The initial margin and maintenance margin are determined by formulas and are equal

Which of the following describes a difference between a warrant and an exchange-traded stock option? a. In a warrant issue, someone has guaranteed the performance of the option seller in the event that the option is exercised b. The number of warrants is fixed whereas the number of exchange-traded options in existence depends on trading c. Exchange-traded stock options have a strike price d. Warrants cannot be traded after they have been purchased

b. The number of warrants is fixed whereas the number of exchange-traded options in existence depends on trading

Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options? a. $100 b. $200 c. $300 d. $400

c. $300

Which of the following describes LEAPS? a. Options which are partly American and partly European b. Options where the strike price changes through time c. Exchange-traded stock options with longer lives than regular exchange-traded stock options d. Options on the average stock price during a period of time

c. Exchange-traded stock options with longer lives than regular exchange-traded stock options

The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the trader's net profit or loss? a. Loss of $1,500 b. Loss of $500 c. Gain of $1,500 d. Loss of $1,000

c. Gain of $1,500

An investor has exchange-traded put options to sell 100 shares for $20. There is a 2 for 1 stock split. Which of the following is the position of the investor after the stock split? a. Put options to sell 100 shares for $20 b. Put options to sell 100 shares for $10 c. Put options to sell 200 shares for $10 d. Put options to sell 200 shares for $20

c. Put options to sell 200 shares for $10

Which of the following describes a short position in an option? a. A position in an option lasting less than one month b. A position in an option lasting less than three months c. A position in an option lasting less than six months d. A position where an option has been sold

d. A position where an option has been sold

Which of the following describes a covered call? a. A long call option on a stock plus a long position in the stock b. A long call option on a stock plus a short put option on the stock c. A short call option on a stock plus a short position in the stock d. A short call option on a stock plus a long position in the stock

d. A short call option on a stock plus a long position in the stock

Which of the following is an example of an option series? a. All calls on a certain stock b. All calls with a particular strike price on a certain stock c. All calls with a particular time to maturity on a certain stock d. All calls with a particular time to maturity and strike price on a certain stock

d. All calls with a particular time to maturity and strike price on a certain stock

22. Which of the following is true? a. A long call is the same as a short put b. A short call is the same as a long put c. A call on a stock plus a stock is the same as a put d. None of the above

d. None of the above

Which of the following is true for an interest rate swap? a. A swap is usually worth close to zero when it is first negotiated b. Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into c. Comparative advantage is a valid reason for entering into the swap d. None of the above

d. None of the above

Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true? a. It is possible for both options to be in the money b. It is possible for both options to be out of the money c. One of the options must be in the money d. One of the options must be either in the money or at the money

d. One of the options must be either in the money or at the money