Qbank 46-53

Any rational quoted price for a financial instrument should: A)provide no opportunity for arbitrage. B)be low enough for most investors to afford. C)provide an opportunity for investors to make a profit.

A

In a defined contribution pension plan, investment risk is borne by the: A)employee. B)employer. C)plan manager.

A

The settlement price for a futures contract is: A)an average of the trade prices during the 'closing period'. B)the price of the asset in the future for all trades made in the same day. C)the price of the last trade of a futures contract at the end of the trading day.

A

At expiration, the value of a European call option is: A)equal to its intrinsic value. B)equal to the asset price minus the present value of the exercise price. C)less than that of an otherwise identical American call option.

A european or american value of call is always instrinsic value

A health care company purchased a new MRI machine on 1/1/X3. At year-end the company recorded straight-line depreciation expense of $75,000 for book purposes and accelerated depreciation expense of $94,000 for tax purposes. Management estimates warranty expense related to corrective eye surgeries performed in 20X3 to be $250,000. Actual warranty expenses of $100,000 were incurred in 20X3 related to surgeries performed in 20X2. The company's tax rate for the current year was 35%, but a tax rate of 37% has been enacted into law and will apply in future periods. Assuming these are the only relevant entries for deferred taxes, the company's recorded changes in deferred tax assets and liabilities on 12/31/X3 are closest to: DTADTL A)$55,500$7,030 B)$52,500$6,650 C)$55,500$6,650

A dtl = tax dep - financial statement dep x future tax rate 37% dta= estimated warranty - actual warranty x future tax rate 37%

A synthetic European call option includes a short position in: A)a risk-free bond. B)a European put option. C)the underlying asset.

A,

In estimating pro forma cash flows for a company, analysts typically hold which of the following factors constant? A)Sales. B)Noncash working capital as a percentage of sales. C)Repayments of debt.

A,

The calculation of derivatives values is based on an assumption that: A)arbitrage opportunities are exploited rapidly. B)arbitrage opportunities do not arise in real markets. C)investors are risk neutral.

A,

There are benefits to diversification as long as: A)the correlation coefficient between the assets is less than 1. B)there must be perfect negative correlation between the assets. C)there is perfect positive correlation between the assets.

A,

Which of the following instruments is a component of the put-call-forward parity relationship? A)The present value of the forward price of the underlying asset. B)The spot price of the underlying asset. C)The future value of the forward price of the underlying asset.

A,

On January 1, Jonathan Wood invests $50,000. At the end of March, his investment is worth $51,000. On April 1, Wood deposits $10,000 into his account, and by the end of June, his account is worth $60,000. Wood withdraws $30,000 on July 1 and makes no additional deposits or withdrawals the rest of the year. By the end of the year, his account is worth $33,000. The time-weighted return for the year is closest to: A)10.4%. B)7.0%. C)5.5%.

A, 51/50 - 1 = 2% 60/61 -1 = (1.64%) 33/30 -1 = 10% sum is 10.36%

The spot price of an asset is $35 and the risk-free rate is 3%. If the net cost of carry for the asset over the next three months is $1 in present value terms, the no-arbitrage 3-month forward price is closest to: A)$34.25 B)$33.75 C)$34.00

A, =(35-1) x (1.03)^3/12 spot - cost carry x 1+rf^t/12 forward price

Compared to the prior year, Chart Industries has reported that its operating cycle has remained relatively stable while its cash conversion cycle has decreased. The most likely explanation for this is that the firm: A)is relying more on its suppliers for short-term liquidity. B)is paying its bills for raw materials more rapidly. C)has improved its inventory turnover.

A, CCC is operating cycle - days payable outstanding days payable must have increased

Structural subordination means that a parent company's debt: A)has a lower priority of claims to a subsidiary's cash flows than the subsidiary's debt. B)has a higher priority of claims to a subsidiary's cash flows than the subsidiary's debt. C)ranks pari passu with a subsidiary's debt with respect to the subsidiary's cash flows.

A, CF from subsidiary are used to pay subsidiary's own debt before paid to parent company,

Promised payments to pension beneficiaries are a responsibility of the plan sponsor in: A)a defined benefit plan only. B)both a defined benefit plan and a defined contribution plan. C)a defined contribution plan only.

A, DBP: promised payments to beneficiaries are responsibility of FIRM DCP: no fixed payments promised to beneficiaries

Myron Jackson is a private equity fund manager specializing in distressed companies. His investment philosophy is based on the principle that capital structure problems can be fixed, but industry characteristics dictate business models. Jackson would most likely be interested in distressed firms with which of the following characteristics? A)High financial risk and low operating risk. B)High operating risk and low financial risk. C)High operating risk and high financial risk.

A, Financial risk: capital structure Operating risk: operating cost structure capital can be FIXED so go with firms that can be fixed

Compared to corporate bonds with the same credit ratings, municipal general obligation (GO) bonds typically have less credit risk because: A)default rates on GOs are typically lower for same credit ratings. B)GOs are not affected by economic downturns. C)governments can print money to repay debt.

A, GO bonds' creditworthiness is affected by economic downturns sovereigns can print money but municipalities cannot

Which of the following statements about the internal rate of return (IRR) and net present value (NPV) is least accurate? A)For mutually exclusive projects, if the NPV rankings and the IRR rankings give conflicting signals, you should select the project with the higher IRR. B)The discount rate that causes the project's NPV to be equal to zero is the project's IRR. C)The IRR is the discount rate that equates the present value of the cash inflows with the present value of the outflows.

A, NPV is always preferred over IRR IRR is annual growth rate, sets NPV to 0 NPV is difference between inflows and outflows

The expected rate of return is 1.5 times the 16% expected rate of return from the market. What is the beta if the risk free rate is 8%? A)2. B)3. C)4.

A, algebra with capm

A $100,000 par value bond has a full price of $99,300, a Macaulay duration of 6.5, and an annual modified duration of 6.1. The bond's money duration per $100 par value is closest to: A)$606. B)$6.06. C)$645

A, annual modddur x full price per $100 6.1x$99.3

A bond has a duration of 10.62 and a convexity of 182.92. For a 200 basis point increase in yield, what is the approximate percentage price change of the bond? A)-17.58%. B)-1.62%. C)-24.90%.

A, approx change -(duration x changeyield) + .5(convexity)xchangeyield²

A firm has average days of receivables outstanding of 22 compared to an industry average of 29 days. An analyst would most likely conclude that the firm: A)may have credit policies that are too strict. B)has better credit controls than its peer companies. C)has a lower cash conversion cycle than its peer companies.

A, avg days of receivables should be close to industry avg.

The debt of Savanna Equipment, Inc. has an average maturity of ten years and a BBB rating. A market yield to maturity is not available because the debt is not publicly traded, but the market yield on debt with similar characteristics is 8.33%. Savanna is planning to issue new ten-year notes that would be subordinate to the firm's existing debt. The company's marginal tax rate is 40%. The most appropriate estimate of the after-tax cost of this new debt is: A)More than 5.0%. B)5.0%. C)Between 3.3% and 5.0%.

A, because the new debt will be SUBORDINATED, investors demand higher yields with subordinated

A one-period binomial model is useful for valuing options because it: A)can account for contingent payoffs of options. B)does not require an assumption about volatility. C)considers the additional risk inherent in options.

A, binomial models are used to value options because they can account for contingent payoffs,

Which of the following statements about an embedded call feature in a bond is least accurate? The call feature: A)increases the bond's duration, increasing price risk. B)reduces the bond's capital appreciation potential. C)exposes investors to additional reinvestment rate risk.

A, call provision DECREASES bond's duration because it introduces prepayment risk that will be factored into calculation

Which of the following best describes why adding a commodities index position to a portfolio of stocks and bonds may be beneficial? Commodities index positions: A)serve as a hedge against inflation. B)are positively correlated with stock and bond prices. C)benefit from commodity markets oscillating between contango and backwardation.

A, commodity futures and inflation is positive

Given the following data, what is the correlation coefficient between the two stocks and the Beta of stock A? standard deviation of returns of Stock A is 10.04% standard deviation of returns of Stock B is 2.05% standard deviation of the market is 3.01% covariance between the two stocks is 0.00109 covariance between the market and stock A is 0.002 Correlation Coefficient Beta (stock A) A)0.5296, 2.20 B)0.5296, 0.06 C)0.6556, 2.20

A, cov two stocks/sd x sd cov market and A / VARIANCE of market

Sensitivity of a bond's price to a change in yield at a specific maturity is least appropriately estimated by using: A)effective duration. B)key rate duration. C)partial duration. Explanation

A, effective: sensitivity in price of bond price to parallel shift in yield key rate/partial: measure sensitivity of bond price to change in yield at specific maturity

Endowments and foundations typically have investment needs that can be characterized as: A)long time horizon, high risk tolerance, and low liquidity needs. B)long time horizon, low risk tolerance, and high liquidity needs. C)short time horizon, low risk tolerance, and low liquidity needs.

A, endowments and DBP have high risk tolerance, will risk more money for higher returns, low liquidity

Which of the following statements about long positions in put and call options is most accurate? Profits from a long call: A)are positively correlated with the stock price and the profits from a long put are negatively correlated with the stock price. B)are negatively correlated with the stock price and the profits from a long put are positively correlated with the stock price. C)and a long put are positively correlated with the stock price.

A, for a call, the buyer's potential gain is unlimited, call is in the money when stock prices exceeds strike price, aka buyer profits are positively correlated with strike price

Which of the following statements about independent projects is least accurate? A)The internal rate of return and net present value methods can yield different accept/reject decisions for independent projects. B)If the internal rate of return is less than the cost of capital, reject the project. C)The net present value indicates how much the value of the firm will change if the project is accepted.

A, for independent projects, IRR and NPV accept/reject decision is same. for mutually exclusive they differ

One of the assumptions underlying the capital asset pricing model is that: A)there are no transactions costs or taxes. B)each investor has a unique time horizon. C)only whole shares or whole bonds are available.

A, frictionless markets (no tax or transaction costs) all investors have the SAME one-period time horizon

Greater volatility in the price of the underlying asset will have what effect on the value of a call option and the value of a put option? Value of a call option, Value of a put option A)Increase, Increase B)Decrease, Increase C)Increase, Decrease

A, greater volatility in price increase both, since value can fall no lower than 0 for options,

A private equity provision that requires managers to return any periodic incentive fees resulting in investors receiving less than 80% of profits is a: A)clawback. B)drawdown. C)high water mark.

A, high water mark: value a failing manager must get above to get bonus hurdle rate: min profit or returns a hedge fund must earn before it can start charging fees

A decrease in the riskless rate of interest, other things equal, will: A)decrease call option values and increase put option values. B)decrease call option values and decrease put option values. C)increase call option values and decrease put option values.

A, higher rf increase call value higher rf decreases put value

Under which approach to valuing real estate properties is an analyst most likely to estimate a capitalization rate? A)Income approach. B)Cost approach. C)Comparable sales approach.

A, income approach estimates values by calculation of pv of future cash flows or noi/cap rate comparable sales: property values based on recent sales cost: estimated cost to replace existing property

If the margin balance in a futures account with a long position goes below the maintenance margin amount: A)a deposit is required to return the account margin to the initial margin level. B)a margin deposit equal to the maintenance margin is required within two business days. C)a deposit is required which will bring the account to the maintenance margin level.

A, initial margin level is high and maintenance is low

For two European put options that differ only in their time to expiration, which of the following is most accurate? The longer-term option: A)can be worth less than the shorter-term option. B)is worth more than the shorter-term option. C)is worth at least as much as the shorter-term option.

A, longer term option can be less valuable than the short

An investor buys a bond that has a Macaulay duration of 3.0 and a yield to maturity of 4.5%. The investor plans to sell the bond after three years. If the yield curve has a parallel downward shift of 100 basis points immediately after the investor buys the bond, her annualized horizon return is most likely to be: A)approximately 4.5%. B)less than 4.5%. C)greater than 4.5%.

A, macdur = investment horizon (3 and 3 years) market price risk and reinvestment risk offset and horizon return should be close to ytm

Which of the following five year bonds has the highest interest rate sensitivity? A)Zero-coupon bond. B)Option-free 5% coupon bond. C)Floating rate bond.

A, macdur of zero coupon bond is equal to its maturity, price is GREATLY affected by changes in interest rates because its only cash flow is at maturity

The market model of the expected return on a risky security is best described as a(n): A)single-factor model. B)two-factor model. C)arbitrage-based model.

A, market model is a single factor model

Compared to European put options on an asset, otherwise identical American put options on the asset are most likely to be more valuable if: A)the asset value is significantly lower than the exercise price. B)the asset pays dividends during the life of the option. C)the options are out-of-the-money.

A, put early access is better if asset value is significantly lower than exercise call options have value with dividends

The price value of a basis point (PVBP) for a 18 year, 8% annual pay bond with a par value of $1,000 and yield of 9% is closest to: A)$0.82. B)$0.80. C)$0.44.

A, pvbp = initial price - price if yield changed by 1 bp so you do npv for 9 and 9.1

The component of the return on a futures position that results from interest earned on U.S. Treasury bills deposited to establish the position is called the: A)collateral yield. B)current yield. C)roll yield.

A, return earned on collateral posted to satisfy margin requirements, most cases, collateral posted will be U.S t-bills roll yield: return from adjusting a futures position from one contract to a longer dated contract

The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as: A)lower ROA in the current period and higher ROA in later periods. B)lower ROA in the current period and no effect on ROA in later periods. C)higher ROA in the current period and lower ROA in later periods.

A, writing down inventory to NRV decreases NI and total assets in period of write-down long run, lower valued inventory will decrease cogs

An investor calculates the following statistics on her two-stock (A and B) portfolio. σA = 20% σB = 15% rA,B = 0.32 WA = 70% WB = 30% The portfolio's standard deviation is closest to: A)0.1600. B)0.0256. C)0.1832.

A, σ = [WA^2σA^2 + WB^2σB^2 + 2WAWBσAσBρA,B]^1/2

Which of the following will increase the value of a call option? A)An increase in volatility. B)An increase in the exercise price. C)A dividend on the underlying asset.

A, increase both call and put`

Moore Ltd. uses the LIFO inventory cost flow assumption. Its cost of goods sold in 20X8 was $800. A footnote in its financial statements reads: "Using FIFO, inventories would have been $70 higher in 20X8 and $80 higher in 20X7." Moore's COGS if FIFO inventory costing were used in 20X8 is closest to: A)$810. B)$790. C)$730.

A, FIFO COGS = LIFO cogs - (ending lifo - beg lifo)

Which of the following is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion? A)Purchase corporate bonds and sell Treasury bonds. B)Sell lower-rated corporate bonds and buy higher-rated corporate bonds. C)Sell corporate bonds and purchase Treasury bonds.

A, corporate yield spreads narrow during expansion (reflecting decreased credit risk). prices of corporate bonds will rise relative to treasuries

Consider a bond with modified duration of 5.61 and convexity of 43.84. Which of the following is closest to the estimated percentage price change in the bond for a 75 basis point decrease in interest rates? A)4.21%. B)4.33%. C)4.12%.

B approx price

If central bank actions caused the risk-free rate to increase, what is the most likely change to cost of debt and equity capital? A)One increase and one decrease. B)Both increase. C)Both decrease.

B both would increase

Beta is a measure of: A)company-specific risk. B)systematic risk. C)total risk.

B fluctuations of a stock to changes in the overall stock market

If the price of a forward contract is greater than the price of an identical futures contract, the most likely explanation is that: A)the forward contract is more liquid. B)the futures contract requires daily settlement. C)the futures contract is more difficult to exit.

B futures positions has daily settlement so it requires cash flows during life

Which of the following bonds has the shortest duration? A bond with a: A)20-year maturity, 6% coupon rate. B)10-year maturity, 10% coupon rate. C)10-year maturity, 6% coupon rate.

B shorter maturity time and higher coupon will have shortest duration

An investor buys a share of stock for $200.00 at time t = 0. At time t = 1, the investor buys an additional share for $225.00. At time t = 2 the investor sells both shares for $235.00. During both years, the stock paid a per share dividend of $5.00. What are the approximate time-weighted and money-weighted returns respectively? A)9.0%; 15.0%. B)10.8%; 9.4%. C)7.7%; 7.7%.

B time-weighted: (225 + 5 - 200 ) / 200 = 15% (470 + 10 - 450) / 450 = 6.67% sqrt(1.15/1.0667) money-weighted: use financial calc, negative for buys and positives for sells + divs

An investor purchases a 4-year, 6%, semiannual-pay Treasury note for $9,485. The security has a par value of $10,000. To realize a total return equal to 7.515% (its yield to maturity), all payments must be reinvested at a return of: A)more than 7.515%. B)7.515%. C)less than 7.515%.

B,

Duration and convexity are most likely to produce more accurate estimates of interest rate risk when the term structure of yield volatility is: A)upward sloping. B)flat. C)downward sloping.

B,

How does the price-yield relationship for a callable bond compare to the same relationship for an option-free bond? The price-yield relationship is best described as exhibiting: A)negative convexity for the callable bond and positive convexity for an option-free bond. B)negative convexity at low yields for the callable bond and positive convexity for the option-free bond. C)the same convexity for both bond types.

B,

A non-callable bond has a modified duration of 7.26. Which of the following is the closest to the approximate price change of the bond with a 25 basis point increase in rates? A)1.820%. B)-1.820%. C)-0.018%.

B, % price change is -(modur)(changeytm)

Negative convexity is most likely to be observed in: A)government bonds. B)callable bonds. C)zero coupon bonds.

B, all noncallable bonds are convex... all callable are negative

A $1,000 par value bond has a modified duration of 5. If the market yield increases by 1% the bond's price will: A)increase by $50. B)decrease by $50. C)decrease by $60.

B, approx change -(moddur)(changeytm)

Negative effective convexity will most likely be exhibited by a: A)putable bond at high yields. B)callable bond at low yields. C)callable bond at high yields.

B, callable bond trading with low yield will have negative effective convexity

An analyst has estimated the following: Correlation of Bahr Industries returns with market returns = 0.8 Variance of the market returns = 0.0441 Variance of Bahr returns = 0.0225 The beta of Bahr Industries stock is closest to: A)0.67. B)0.57. C)0.77.

B, corr of b and mrkt x sd b x sd mrkt / variance of mrkt

A negative net cost of carry will: A)have no effect on the no-arbitrage forward price. B)increase the no-arbitrage forward price. C)decrease the no-arbitrage forward price.

B, cost of carry increase forward prices, cost of carry (holding assets cost is greater than benefit)

Other things equal, the no-arbitrage forward price of an asset will be higher if the asset has: A)dividend payments. B)storage costs. C)convenience yield.

B, cost of holding it will be higher if it needs storage costs,

Accelerated depreciation methods for financial reporting are most likely to have which of the following effects on a company's financial ratios during the early years of an asset's life? A)Lower debt-to-equity ratio. B)Higher asset turnover ratio. C)Lower current ratio.

B, higher depreciation expense in the early years, total assets will be lower

A 9-year corporate bond with a 3.25% coupon is priced at €103.96. This bond's duration and convexity are 7.8 and 69.8. If the bond's yield increases by 100 basis points, the impact on the bondholder's return is closest to: A)+8.15%. B)-7.45%. C)-7.80%.

B, impact on bond return -(duration x yield) + 0.5(convexity)x(changeinyield²

One notable difference between an issuer credit rating and an issue credit rating is that an: A)issue credit rating is always notched below the issuer rating. B)issuer credit rating reflects the borrower's overall creditworthiness. C)issue credit rating applies to the issuer's senior unsecured debt.

B, issuer is the one it is being issued to senior unsecured debt is usually the basis for issuer credit rating notching can be upwards or downwards

Bond X and Bond Y have the same par value, coupon, maturity, and credit rating, but Bond X trades at a higher price than Bond Y. A possible reason for this difference is that: A)Bond X has a higher expected loss in a default. B)the market expects a downgrade to Bond Y's credit rating. C)Bond Y has a higher expected recovery rate in a default.

B, lag in bonds' credit rating on the assessment of their creditworthiness

Which of the following will be the greatest for a putable bond at relatively high yields? A)Modified duration of the bond ignoring the option. B)Macaulay duration of the bond ignoring the option. C)Effective duration of the bond.

B, moddur is less than macaulay

The correlation of returns on the risk-free asset with returns on a portfolio of risky assets is: A)negative. B)zero. C)positive.

B, no correlation at all

Helmut Humm, manager at a large U.S. firm, has just been assigned to the capital budgeting area to replace a person who left suddenly. One of Humm's first tasks is to calculate the company's weighted average cost of capital (WACC) - and fast! The CEO is scheduled to present to the board in half an hour and needs the WACC - now! Luckily, Humm finds clear notes on the target capital component weights. Unfortunately, all he can find for the cost of capital components is some handwritten notes. He can make out the numbers, but not the corresponding capital component. As time runs out, he has to guess. Here is what Humm deciphered: Target weights: wd = 30%, wps = 20%, wce = 50%, where wd, wps, and wce are the weights used for debt, preferred stock, and common equity. Cost of components (in no particular order): 6.0%, 15.0%, and 8.5%. The cost of debt is the after-tax cost. If Humm guesses correctly, the WACC is: A)9.2%. B)11.0%. C)9.0%.

B, order capital components from cheapest to most expensive debt, preferred stock, common equity .3x6% + .2x8.5% + .5x15% WACC including preferred is you just add all the shits

The ratio of an equally weighted portfolio's standard deviation of return to the average standard deviation of the securities in the portfolio is known as the: A)Sharpe ratio. B)diversification ratio. C)relative risk ratio.

B, portsd/avg sd of returns sharpe: performance of investment vs risk free asset Rp - Rf / sd of port

An equally weighted portfolio of a risky asset and a risk-free asset will exhibit: A)more than half the returns standard deviation of the risky asset. B)half the returns standard deviation of the risky asset. C)less than half the returns standard deviation of the risky asset.

B, risk free asset has sd of returns equal to zero

James Anthony has a short position in a put option with a strike price of $94. If the stock price is below $94 at expiration, what will happen to Anthony's short position in the option? A)The person who is long the put option will not exercise the put option. B)He will have the option exercised against him at $94 by the person who is long the put option. C)He will let the option expire.

B, short position in put, sell the right

Which of the following statements about the efficient frontier is NOT correct? A)A portfolio to the left of the efficient frontier is not attainable, while a portfolio to the right of the efficient frontier is inefficient. B)The slope of the efficient frontier increases steadily as one moves up the curve. C)The efficient frontier line bends backwards due to less than perfect correlation between assets.

B, the slope of efficient frontier DECREASES steadily as one moves up the curve other statements are true

If a U.S. investor is forecasting that the yield spread between U.S. Treasury bonds and U.S. corporate bonds is going to widen, then which of the following is most likely to be CORRECT? A)The U.S. dollar will weaken. B)The economy is going to contract. C)The economy is going to expand.

B, yield spreads widening is a sign of potential worsening economy and contraction

The factors that must be considered when estimating the credit risk of a bond include: A)the bond rating, the recovery rate, and the yield volatility. B)only the bond rating and the recovery rate. C)only the bond rating.

B, yield volatility is combined with duration to estimate PRICE RISK

A bond with a yield to maturity of 8.0% is priced at 96.00. If its yield increases to 8.3% its price will decrease to 94.06. If its yield decreases to 7.7% its price will increase to 98.47. The modified duration of the bond is closest to: A)4.34. B)7.66. C)2.75.

B, approx moddur down yield - up yield / 2 x p0 x change yield .003

Derivatives valuation is based on risk-neutral pricing because: A)risk tolerances of long and short investors are assumed to offset. B)this method provides an intrinsic value to which investors apply a risk premium. C)the risk of a derivative is based entirely on the risk of its underlying asset.

C

When compared to modified duration, effective duration: A)places less weight on recent changes in the bond's ratings. B)is equal to modified duration for callable bonds but not putable bonds. C)factors in how embedded options will change expected cash flows.

C

Which of the following statements about forward contracts is least accurate? A)Both parties to a forward contract have potential default risk. B)The long promises to purchase the asset. C)A forward contract can be exercised at any time.

C

A call option's intrinsic value: A)increases as the stock price increases above the strike price, while a put option's intrinsic value decreases as the stock price decreases below the strike price. B)decreases as the stock price increases above the strike price, while a put option's intrinsic value increases as the stock price decreases below the strike price. C)increases as the stock price increases above the strike price, while a put option's intrinsic value increases as the stock price decreases below the strike price.

C,

Consider a European call option and put option that have the same exercise price, and a forward contract to buy the same underlying asset as the two options. An investor buys a risk-free bond that will pay, on the expiration date of the options and the forward contract, the difference between the exercise price and the forward price. According to the put-call-forward parity relationship, this bond can be replicated by: A)buying the call option and writing the put option. B)writing the call option and writing the put option. C)writing the call option and buying the put option.

C,

It is possible to profit from arbitrage when there are no costs or benefits to holding the underlying asset and the forward contract price is: A)less than the present value of the spot price. B)greater than the present value of the spot price. C)less than the future value of the spot price.

C,

When calculating the payoff for a stock option, if the stock price is greater than the strike price at expiration: A)the payoff to a put option is equal to the strike price. B)a call option expires worthless. C)the payoff to a call option is the difference between the stock price and the strike price.

C,

A noncallable bond with seven years remaining to maturity is trading at 108.1% of a par value of $1,000 and has an 8.5% coupon. If interest rates rise 50 basis points, the bond's price will fall to 105.3% and if rates fall 50 basis points, the bond's price will rise to 111.0%. Which of the following is closest to the effective duration of the bond? A)5.54. B)6.12. C)5.27.

C, (basis down - basis up) / (2 x P0 x changeytm)

Which type of risk is positively related to expected excess ret urns according to the CAPM? A)Unique. B)Diversifiable. C)Systematic.

C, CAPM concludes that expected returns are a positive function of systematic risk

An investor buys one share of stock for $100. At the end of year one she buys three more shares at $89 per share. At the end of year two she sells all four shares for $98 each. The stock paid a dividend of $1.00 per share at the end of year one and year two. What is the investor's money-weighted rate of return? A)5.29%. B)0.06%. C)6.35%.

C, CFO = -100; CF1 = -266; CF2 = 396; CPT → IRR = 6.35%.

A firm expects to produce 200,000 units of flour that can be sold for $3.00 per bag. The variable costs per unit are $2.00, the fixed costs are $75,000, and interest expense is $25,000. The degree of operating leverage (DOL) and the degree of total leverage (DTL) is closest to: DOL, DTL A)1.3, 1.3 B)1.6, 1.3 C)1.6, 2.0

C, DOL = Q(P-V) / Q(P-V)-F q x pm / q x pm - f - i DFL = %changeNI/%changeEBIT

For a company uses the LIFO inventory valuation method, a financial analyst can adjust the current ratio to the FIFO method by: A)subtracting the LIFO reserve from current assets. B)adding the LIFO reserve to current liabilities. C)adding the LIFO reserve to current assets.

C, Fifo inventory = lifo inventory + lifo reserve to current assets

Which of the following statements about municipal bonds is least accurate? A)A municipal bond guarantee is a form of insurance provided by a third party other than the issuer. B)Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields. C)Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

C, GO bonds are backed by full faith, credit, and taxing power of issuer, thus tend to have lower yields than revenue bonds!

A bond analyst is looking at historical returns for two bonds, Bond 1 and Bond 2. Bond 2's returns are much more volatile than Bond 1. The variance of returns for Bond 1 is 0.012 and the variance of returns of Bond 2 is 0.308. The correlation between the returns of the two bonds is 0.79, and the covariance is 0.048. If the variance of Bond 1 increases to 0.026 while the variance of Bond 2 decreases to 0.188 and the covariance remains the same, the correlation between the two bonds will: A)increase. B)remain the same. C)decrease.

C, P1,2 = 0.048/0.026⅟² x 0.188⅟²) = 0.69 cov/sd*sd ohh

An annual-pay bond is priced at 101.50. If its yield to maturity decreases 100 basis points, its price will increase to 105.90. If its yield to maturity increases 100 basis points, its price will decrease to 97.30. The bond's approximate modified convexity is closest to: A)0.2. B)4.2. C)19.7.

C, V- + V+ - 2V0 / V0/changeinytm²

Which of the following statements about portfolio theory is least accurate? A)Assuming that the correlation coefficient is less than one, the risk of the portfolio will always be less than the simple weighted average of individual stock risks. B)For a two-stock portfolio, the lowest risk occurs when the correlation coefficient is close to negative one. C)When the return on an asset added to a portfolio has a correlation coefficient of less than one with the other portfolio asset returns but has the same risk, adding the asset will not decrease the overall portfolio standard deviation.

C, adding the asset WILL decrease overall port SD

Which is NOT an assumption of capital market theory? A)There are no taxes or transaction costs. B)There is no inflation. C)Investments are not divisible.

C, all investments are definitely divisible

The price of a pay-fixed receive-floating interest rate swap is: A)zero when floating rates and fixed rates are equal. B)negative when floating rates are highly volatile. C)determined by expected future short-term rates.

C, calculated as a function of future short-term rates

Which of the following is the most accurate description of the market portfolio in Capital Market Theory? The market portfolio consists of all: A)risky and risk-free assets in existence. B)equity securities in existence. C)risky assets in existence.

C, contains all risky assets, does not contain any risk-free assets

A firm with a corporate family rating (CFR) of A3/A- issues secured bonds. Covenants to these bonds include a limitation on liens and a change of control put. If credit rating agencies notch this issue, its credit rating is most likely to be: A)Baa2/BBB. B)Baa1/BBB+. C)A2/A.

C, credit rating is based on senior unsecured debt a limitation on liens limits the amount of secured debt a borrower can carry (this reduces credit risk) rating moves upwards

If futures prices are positively correlated with interest rates, futures prices will be: A)less than forward prices. B)unaffected relative to forward prices. C)greater than forward prices.

C, daily settlement of long futures positions will produce excess margin when interest is high and require margin when interest is low

An investor who buys bonds that have a Macaulay duration less than his investment horizon: A)will benefit from decreasing interest rates. B)is minimizing reinvestment risk. C)has a negative duration gap.

C, duration gap is difference between macaulay duration and investment horizon,

Which of the following pooled investments is least likely to employ large amounts of leverage? A)Global macro hedge fund. B)Private equity buyout fund. C)Venture capital fund.

C, hedge funds and buyout firms use high leverage to acquire assets, VC firms involve in equity interest

The process that ensures that two securities positions with identical future payoffs, regardless of future events, will have the same price is called: A)the law of one price. B)exchange parity. C)arbitrage.

C, law of one price is not a process, it is something that is enforced by arbitrage

Which of the following relationships between arbitrage and market efficiency is least accurate? A)The concept of rationally priced financial instruments preventing arbitrage opportunities is the basis behind the no-arbitrage principle. B)Investors acting on arbitrage opportunities help keep markets efficient. C)Market efficiency refers to the low cost of trading derivatives because of the lower expense to traders.

C, market efficiency is relevant information reflected in asset prices, arbitrage eliminates pricing differences

Springfield Fund of Funds invests in two hedge funds, DXS and REF funds. Springfield initially invested $50.0 million in DXS and $100.0 million in REF. After one year, DXS and REF were valued at $55.5 million and $104.5 million, respectively, net of both hedge fund management fees and incentive fees. Springfield Fund of Funds charges 1.0% management fee based on assets under management at the beginning of the year and a 10.0% incentive fee independent of management fees. The annual net return for Springfield Fund of Funds is closest to: A)5.5%. B)6.0%. C)5.0%.

C, mgmt fee 1.5M net value at end of year: 160m incentive fee (160-150) x 10% = 1m total fee = 2.5m 160 - 2.5 = 157.5m 157.5/150 -1 = 5%

Which of the following will result from futures prices for a particular commodity being in contango? A)Positive current yield. B)Negative collateral yield. C)Negative roll yield.

C, positive roll yield results from a backwardated market negative roll yield is produced in a contango market in backwards, future prices are lower than spot prices contango future>spot

Price risk will dominate reinvestment risk when the investor's: A)investment horizon is less than the bond's tenor. B)duration gap is negative. C)duration gap is positive.

C, price risk dominates when investment horizon is less than bond's macaulay duration

Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is: A)out-of-the-money by $2.50. B)in-the-money by $10.00. C)in-the-money by $7.50.

C, sell stock for $7.50 more than price

An analyst who is evaluating a firm's working capital management would be least likely to be concerned if the firm's: A)number of days of inventory is higher than that of its peers. B)total asset turnover is lower than its industry average. C)operating cycle is shorter than that of its peers.

C, shorter operating cycle means shorter CCC (this is an indication of better working cap mgmt) higher days of inventory lengthens CCC and is poor wc mgmt,

An investor makes the following investments: She purchases a share of stock for $50.00. After one year, she purchases an additional share for $75.00. After one more year, she sells both shares for $100.00 each. There are no transaction costs or taxes. During year one, the stock paid a $5.00 per share dividend. In year 2, the stock paid a $7.50 per share dividend. The investor's required return is 35%. Her money-weighted return is closest to: A)16.1%. B)-7.5%. C)48.9%.

C, use calc boi

The top-down analysis approach is most likely to be employed in which step of the portfolio management process? A)The planning step. B)The feedback step. C)The execution step.

C, used to select securities in execution step

Which of the following statements regarding deferred taxes is NOT correct? A)If deferred taxes are not expected to reverse in the future then they should be classified as equity. B)Only those components of deferred tax liabilities that are likely to reverse should be considered a liability. C)If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced.

C, when DTL are included in equity, it will reduce debt-to-equity ratio (by increasing denominator)

A put option has an exercise price of $80, and the stock price is $75 at expiration. The expiration day value of the put option is: A)$0. B)$80. C)$5.

C, you can sell at 80 when they are currently selling for 75

Annual fixed costs at King Mattress amount to $325,000. The variable cost of raw materials and labor is $120 for the typical mattress. Sales prices for mattresses average $160. How many units must King Mattress sell to break even? A)40. B)2,708. C)8,125.

C, fixed/price-vc

Covariance & Correlation Coefficient

Cov : correlation coefficient x sd1 x sd2 Corr : cov/sd1xsd2

An example of a relative value hedge fund strategy is: A)market neutral. B)merger arbitrage. C)convertible arbitrage.

c, relative value strategies: convertible arbitrage fixed income, asset-backed fixed income, general fixed income, volatility market neutral is equity hedge strategy merger arbitrage is even driven strategy

A Canadian hedge fund has a value of C$100 million at the beginning of the year. The fund charges a 2% management fee based on assets under management at the beginning of the year and a 20% incentive fee with a 10% hard hurdle rate. Incentive fees are calculated net of management fees. The value at the end of the year before fees is C$112 million. The net return to investors is closest to: A)8%. B)10%. C)9%.

mgmt: (2m) inventive fee: 112-100-2 - (100*10%) * 20% = 0 110-100=10%

higher macaulay duration more or less sensitive to interest rate changes?

more, bond's price is more volatile,

price risk and reinvestment risk

price: yield and price and negatively correlated reinvestment: proceeds from payment of principle/interest which have to be reinvested are put in at a lower rate than original investment

What kind of Sharpe ratio should you choose

tells us risk-adjusted return, higher better