Chapter 02

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1. Award: 10.00 points Problems? Adjust credit for all students. Which of the following correctly describes a repurchase agreement? The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price. Explanation: A repurchase agreement is an agreement whereby the seller of a security agrees to "repurchase" it from the buyer on an agreed upon date at an agreed upon price. Repos are typically used by securities dealers as a means for obtaining funds to purchase securities. Worksheet Difficulty: 1 Basic Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

2. Award: 10.00 points Problems? Adjust credit for all students. Refer to Figure 2.3 and look at the Treasury bond maturing in November 2040. Required: a. How much would you have to pay to purchase one of these bonds? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What is its coupon rate? Note: Round your answer to 3 decimal places. c. What is the yield to maturity of the bond? Note: Do not round intermediate calculations. Round your answer to 3 decimal places. $ a. Price paid 1,391.80 b. Coupon rate 4.250 % c. Yield to maturity 1.815 % Explanation: a. You would have to pay the ask price of: 139.180% of par value of $1,000 = $1,391.80 b. The coupon rate is 4.250%; implying coupons $42.50 annually or, more precisely $21.25 (semiannually). c. The yield to maturity on a fixed income security is also known as its required return and is reported by The Wall Street Journal and others in the financial press as the ask yield. In this case, the yield to maturity is 1.815%. An investor buying this security today and holding it until it matures will earn an annual return of 1.815%. Students will learn in a later chapter how to compute both the price and the yield to maturity with a financial calculator (as well as some of the other implications of yield calculations). Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

3. Award: 10.00 points Problems? Adjust credit for all students. Suppose investors can earn a return of 2% per 6 months on a Treasury note with 6 months remaining until maturity. The face value of the T-bill is $10,000. Required: What price would you expect a 6-month-maturity Treasury bill to sell for? Note: Round your answer to 2 decimal places. $ Price 9,803.92 Explanation: Treasury bills are discount securities that mature for $10,000. A 6-month T-bill price is the value divided by one plus the semi-annual return: P = $10,000 ÷ 1.02 = $9,803.92 Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

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4. Award: 10.00 points Problems? Adjust credit for all students. Find the after-tax return to a corporation that buys a share of preferred stock at $40, sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 21% tax bracket. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. After-tax rate of return 8.95 % Explanation: The total before-tax income is $4. After the 50% corporate exclusion for preferred stock dividends, the taxable income is: 0.50 × $4 = $2.00 Therefore, taxes are: 0.21 × $2.00 = $0.42 After-tax income is: $4.00 − $0.42 = $3.58 Rate of return is: $3.58 ÷ $40.00 = 8.95% Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

5. Award: 10.00 points Problems? Adjust credit for all students. Refer to Figure 2.8 and look at the listing for Honneywell. Required: a. How many shares can you buy for $5,000? Note: Round down your answer to the nearest whole number. b. What would be your annual dividend income from those shares? Note: Round down your intermediate calculations to the nearest whole number. Round your answer to 2 decimal places. c. What must be Honneywell’s earnings per share? Note: Round your answer to 2 decimal places. d. What was the firm's closing price on the day before the listing? Note: Round your answer to 2 decimal places. $ $ $ a. Number of shares 22 b. Annual dividend income 81.84 c. Earnings per share 6.52 d. Yesterday's closing price 223.53 Explanation: a. You could buy: $5,000 ÷ $227.22 = 22.01 shares. Since it is not possible to trade in fractions of shares, you could buy 22 shares of Honneywell. b. Your annual dividend income would be: 22 × $3.72 = $81.84 c. The price-to-earnings ratio is 34.87 and the price is $227.22. Therefore: P/E = 34.871 = $227.22 ÷ E.P.S → E.P.S = $6.52 d. Honneywell closed today at $227.22, which was $3.69 higher than yesterday’s price of $223.53. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

6. Award: 10.00 points Problems? Adjust credit for all students. Consider the three stocks in the following table. P t represents price at time t , and Q t represents shares outstanding at time t. Stock C splits two for one in the last period. Stock P 0 Q 0 P 1 Q 1 P 2 Q 2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period ( t = 0 to t = 1). Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Calculate the new divisor for the price-weighted index in year 2. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Calculate the rate of return for the second period ( t = 1 to t = 2). Note: Round your answer to 2 decimal places. a. Rate of return 4.17 % b. New divisor 2.34 c. Rate of return 0.00 % Explanation: a. At t = 0, the value of the index is: (90 + 50 + 100) ÷ 3 = 80.00 At t = 1, the value of the index is: (95 + 45 + 110) ÷ 3 = 83.33 The rate of return is: (83.333 ÷ 80) − 1 = 4.17% b. In the absence of a split, Stock C would sell for 110, so the value of the index would be: (95 + 45 + 110) ÷ 3 = 250 ÷ 3 = 83.33 with a divisor of 3. After the split, stock C sells for 55. Therefore, we need to find the divisor (d) such that: 83.33 = (95 + 45 + 55) ÷ d d = 2.34. The divisor fell, which is always the case after a firm in an index splits its shares. c. The return is zero. The index remains unchanged because the return for each stock separately equals zero. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

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7. Award: 10.00 points Problems? Adjust credit for all students. Consider the three stocks in the following table. P t represents price at time t , and Q t represents shares outstanding at time t . Stock C splits two for one in the last period. Stock P 0 Q 0 P 1 Q 1 P 2 Q 2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Required: Calculate the first-period rates of return on the following indexes of the three stocks ( t = 0 to t = 1): Note: Do not round intermediate calculations. Round your answers to 2 decimal places. a. A market-value-weighted index. b. An equally weighted index. a. Rate of return 3.85 % b. Rate of return 1.85 % Explanation: a. Total market value at t = 0 is: $90 × 100 + $50 × 200 + $100 × 200 = $39,000 Total market value at t = 1 is: $95 × 100 + $45 × 200 + $100 × 200 = $40,500 Rate of return = ($40,500 ÷ $39,000) − 1 = 3.85% b. The return on each stock is as follows: r A = (95 ÷ 90) − 1 = 0.0556 r B = (45 ÷ 50) − 1 = −0.10 r C = (110 ÷ 100) − 1 = 0.10 The equally weighted average is: [0.0556 + (−0.10) + 0.10] ÷ 3 = 0.0185 = 1.85% Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

8. Award: 10.00 points Problems? Adjust credit for all students. What would happen to the divisor of the Dow Jones Industrial Average if FedEx, with a current price of around $300 per share, replaced Intel, with a current price of about $55 per share? Effect on the divisor Remain unaffected Explanation: Though it is a price-weighted index and $55 << $300, the level of the Dow Jones Industrial Average will be unaffected. When Intel ($55) replaces FedEx ($300), the divisor used to compute the average price is adjusted to maintain the current level (as would be the case for splits or large stock dividends). Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

9. Award: 10.00 points Problems? Adjust credit for all students. An investor is in a 30% combined federal plus state tax bracket. Required: If corporate bonds offer 6% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? Note: Round your answer to 2 decimal places. Municipal's offer 4.20 % Explanation: The after-tax yield on the corporate bonds is: 0.06 × (1 − 0.30) = 0.042 = 4.20% Therefore, municipals must offer a yield to maturity of at least 4.20%. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

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10. Award: 10.00 points Problems? Adjust credit for all students. Find the equivalent taxable yield of a short-term municipal bond with a yield of 4% for tax brackets of (a) zero, (b) 10%, (c) 20%, and (d) 30%. Note: Round your answers to 2 decimal places. Equivalent Taxable Yield a. Zero 4.00 % b. 10% 4.44 % c. 20% 5.00 % d. 30% 5.71 % Explanation: The equivalent taxable yield is: r taxable = r muni ÷ (1 − t ) Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

11. Award: 10.00 points Problems? Adjust credit for all students. Which security should sell at a greater price? Required: a. A 10-year Treasury bond with a 4% coupon rate versus a 10-year T-bond with a 5% coupon. A 10-year T-bond with a 5% coupon. b. A 3-month expiration call option with an exercise price of $40 versus a 3-month call on the same stock with an exercise price of $35. A 3-month expiration call option with an exercise price of $35. c. A put option on a stock selling at $50 or a put option on another stock selling at $60 (all other relevant features of the stocks and options may be assumed to be identical). A put option on a stock selling at $50. Explanation: a. The ten-year Treasury bond with the higher coupon rate will sell for a higher price because its bondholder receives higher interest payments. b. The call option with the lower exercise price ($35) has more value than one with a higher exercise price. c. The put option written on the lower priced stock has more value than one written on a higher priced stock. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

12. Award: 10.00 points Problems? Adjust credit for all students. Look at the futures listings for the corn contract in Table 2.7 . Required: Suppose you buy one contract for December 2022 delivery. If the contract closes in December at a level of $5.03, what will your profit be? The contract multiplier is 5,000. Note: Round your answer to 2 decimal places. $ Profit 362.50 Explanation: You bought the contract when the futures price was $4.9575 (see Table 2.7). The contract closes at a price of $5.0300, which is $0.0725 more than the original futures price. The contract multiplier is 5,000. Therefore, the gain will be: $0.0725 × 5,000 = $362.50. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

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13. Award: 10.00 points Problems? Adjust credit for all students. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $285 and the stock price in August is $288. Required: a-1. Will you exercise your call? a-2. What is the profit (loss) on your position? b-1. If you had bought the August call with exercise price $280, will you exercise your call? b-2. What is the profit (loss) on your position? c-1. If you had bought the August put with exercise price $280, will you exercise your put? c-2. What is the profit (loss) on your position?  Required A1 Required A2  Complete this question by entering your answers in the tabs below. Will you exercise your call? Required A1 Required A2 Required B1 Required B2 Required C1 Required C2 Will you exercise your call? Yes Explanation: a-1. The call option gives you the right, but not the obligation to buy at $285; the stock is trading in the secondary market at $288. Since the stock price exceeds the exercise price, you exercise the call. a-2. The payoff on the option will be: $288 − $285 = $3.00 The cost was originally $5.06, so the profit is: $3.00 − $5.06 = −$2.06 b-1. Since the stock price is greater than the exercise price, you will exercise the call. b-2. The payoff on the option will be: $288 − $280 = $8.00 The option originally cost $7.74, so the profit is $8.00 − $7.74 = $0.26. c-1. Owning the put option gives you the right, but not the obligation, to sell at $280, but you could sell in the secondary market for $288. It is out of the money and expires without value. c-2. The option originally cost $5.18, so the profit is $0.00 − $5.18 = −$5.18. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

13. Award: 10.00 points Problems? Adjust credit for all students. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $285 and the stock price in August is $288. Required: a-1. Will you exercise your call? a-2. What is the profit (loss) on your position? b-1. If you had bought the August call with exercise price $280, will you exercise your call? b-2. What is the profit (loss) on your position? c-1. If you had bought the August put with exercise price $280, will you exercise your put? c-2. What is the profit (loss) on your position?  Required A1 Required B1  Complete this question by entering your answers in the tabs below. What is the profit (loss) on your position? Note: Round your answer to 2 decimal places. Required A1 Required A2 Required B1 Required B2 Required C1 Required C2 $ Loss 2.06 Explanation: a-1. The call option gives you the right, but not the obligation to buy at $285; the stock is trading in the secondary market at $288. Since the stock price exceeds the exercise price, you exercise the call. a-2. The payoff on the option will be: $288 − $285 = $3.00 The cost was originally $5.06, so the profit is: $3.00 − $5.06 = −$2.06 b-1. Since the stock price is greater than the exercise price, you will exercise the call. b-2. The payoff on the option will be: $288 − $280 = $8.00 The option originally cost $7.74, so the profit is $8.00 − $7.74 = $0.26. c-1. Owning the put option gives you the right, but not the obligation, to sell at $280, but you could sell in the secondary market for $288. It is out of the money and expires without value. c-2. The option originally cost $5.18, so the profit is $0.00 − $5.18 = −$5.18. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

13. Award: 10.00 points Problems? Adjust credit for all students. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $285 and the stock price in August is $288. Required: a-1. Will you exercise your call? a-2. What is the profit (loss) on your position? b-1. If you had bought the August call with exercise price $280, will you exercise your call? b-2. What is the profit (loss) on your position? c-1. If you had bought the August put with exercise price $280, will you exercise your put? c-2. What is the profit (loss) on your position?  Required A2 Required B2  Complete this question by entering your answers in the tabs below. If you had bought the August call with exercise price $280, will you exercise your call? Required A1 Required A2 Required B1 Required B2 Required C1 Required C2 If you had bought the August call with exercise price $280, will you exercise your call? Yes Explanation: a-1. The call option gives you the right, but not the obligation to buy at $285; the stock is trading in the secondary market at $288. Since the stock price exceeds the exercise price, you exercise the call. a-2. The payoff on the option will be: $288 − $285 = $3.00 The cost was originally $5.06, so the profit is: $3.00 − $5.06 = −$2.06 b-1. Since the stock price is greater than the exercise price, you will exercise the call. b-2. The payoff on the option will be: $288 − $280 = $8.00 The option originally cost $7.74, so the profit is $8.00 − $7.74 = $0.26. c-1. Owning the put option gives you the right, but not the obligation, to sell at $280, but you could sell in the secondary market for $288. It is out of the money and expires without value. c-2. The option originally cost $5.18, so the profit is $0.00 − $5.18 = −$5.18. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

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13. Award: 10.00 points Problems? Adjust credit for all students. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $285 and the stock price in August is $288. Required: a-1. Will you exercise your call? a-2. What is the profit (loss) on your position? b-1. If you had bought the August call with exercise price $280, will you exercise your call? b-2. What is the profit (loss) on your position? c-1. If you had bought the August put with exercise price $280, will you exercise your put? c-2. What is the profit (loss) on your position?  Required B1 Required C1  Complete this question by entering your answers in the tabs below. What is the profit (loss) on your position? Note: Round your answer to 2 decimal places. Required A1 Required A2 Required B1 Required B2 Required C1 Required C2 $ Profit 0.26 Explanation: a-1. The call option gives you the right, but not the obligation to buy at $285; the stock is trading in the secondary market at $288. Since the stock price exceeds the exercise price, you exercise the call. a-2. The payoff on the option will be: $288 − $285 = $3.00 The cost was originally $5.06, so the profit is: $3.00 − $5.06 = −$2.06 b-1. Since the stock price is greater than the exercise price, you will exercise the call. b-2. The payoff on the option will be: $288 − $280 = $8.00 The option originally cost $7.74, so the profit is $8.00 − $7.74 = $0.26. c-1. Owning the put option gives you the right, but not the obligation, to sell at $280, but you could sell in the secondary market for $288. It is out of the money and expires without value. c-2. The option originally cost $5.18, so the profit is $0.00 − $5.18 = −$5.18. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

13. Award: 10.00 points Problems? Adjust credit for all students. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $285 and the stock price in August is $288. Required: a-1. Will you exercise your call? a-2. What is the profit (loss) on your position? b-1. If you had bought the August call with exercise price $280, will you exercise your call? b-2. What is the profit (loss) on your position? c-1. If you had bought the August put with exercise price $280, will you exercise your put? c-2. What is the profit (loss) on your position?  Required B2 Required C2  Complete this question by entering your answers in the tabs below. If you had bought the August put with exercise price $280, will you exercise your put? Required A1 Required A2 Required B1 Required B2 Required C1 Required C2 If you had bought the August put with exercise price $280, will you exercise your put? No Explanation: a-1. The call option gives you the right, but not the obligation to buy at $285; the stock is trading in the secondary market at $288. Since the stock price exceeds the exercise price, you exercise the call. a-2. The payoff on the option will be: $288 − $285 = $3.00 The cost was originally $5.06, so the profit is: $3.00 − $5.06 = −$2.06 b-1. Since the stock price is greater than the exercise price, you will exercise the call. b-2. The payoff on the option will be: $288 − $280 = $8.00 The option originally cost $7.74, so the profit is $8.00 − $7.74 = $0.26. c-1. Owning the put option gives you the right, but not the obligation, to sell at $280, but you could sell in the secondary market for $288. It is out of the money and expires without value. c-2. The option originally cost $5.18, so the profit is $0.00 − $5.18 = −$5.18. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

13. Award: 10.00 points Problems? Adjust credit for all students. Refer to Table 2.6 and look at the Microsoft options. Suppose you buy an August expiration call option with exercise price $285 and the stock price in August is $288. Required: a-1. Will you exercise your call? a-2. What is the profit (loss) on your position? b-1. If you had bought the August call with exercise price $280, will you exercise your call? b-2. What is the profit (loss) on your position? c-1. If you had bought the August put with exercise price $280, will you exercise your put? c-2. What is the profit (loss) on your position?  Required C1 Required C2  Complete this question by entering your answers in the tabs below. What is the profit (loss) on your position? Note: Round your answer to 2 decimal places. Required A1 Required A2 Required B1 Required B2 Required C1 Required C2 $ Loss 5.18 Explanation: a-1. The call option gives you the right, but not the obligation to buy at $285; the stock is trading in the secondary market at $288. Since the stock price exceeds the exercise price, you exercise the call. a-2. The payoff on the option will be: $288 − $285 = $3.00 The cost was originally $5.06, so the profit is: $3.00 − $5.06 = −$2.06 b-1. Since the stock price is greater than the exercise price, you will exercise the call. b-2. The payoff on the option will be: $288 − $280 = $8.00 The option originally cost $7.74, so the profit is $8.00 − $7.74 = $0.26. c-1. Owning the put option gives you the right, but not the obligation, to sell at $280, but you could sell in the secondary market for $288. It is out of the money and expires without value. c-2. The option originally cost $5.18, so the profit is $0.00 − $5.18 = −$5.18. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

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14. Award: 10.00 points Problems? Adjust credit for all students. Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. Required: a. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. b. What will be the profit to an investor who buys the put for $6 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60.  Required A Required B  Complete this question by entering your answers in the tabs below. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. Note: Negative amounts should be indicated by a minus sign. Required A Required B $ $ $ $ $ $ $ $ $ $ Stock Price Profit i. 40 (4) ii. 45 (4) iii. 50 (4) iv. 55 1 v. 60 6 Explanation: a. Value of Call at Expiration Initial Cost Profit i. 0 4 −4 ii. 0 4 −4 iii. 0 4 −4 iv. 5 4 1 v. 10 4 6 b. Value of Put at Expiration Initial Cost Profit i. 10 6 4 ii. 5 6 −1 iii. 0 6 −6 iv. 0 6 −6 v. 0 6 −6 Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

14. Award: 10.00 points Problems? Adjust credit for all students. Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. Required: a. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. b. What will be the profit to an investor who buys the put for $6 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60.  Required A Required B  Complete this question by entering your answers in the tabs below. What will be the profit to an investor who buys the put for $6 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. Note: Negative amounts should be indicated by a minus sign. Required A Required B $ $ $ $ $ $ $ $ $ $ Stock Price Profit i. 40 4 ii. 45 (1) iii. 50 (6) iv. 55 (6) v. 60 (6) Explanation: a. Value of Call at Expiration Initial Cost Profit i. 0 4 −4 ii. 0 4 −4 iii. 0 4 −4 iv. 5 4 1 v. 10 4 6 b. Value of Put at Expiration Initial Cost Profit i. 10 6 4 ii. 5 6 −1 iii. 0 6 −6 iv. 0 6 −6 v. 0 6 −6 Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 02: Asset Classes and Financial Instruments > Chapter 02 Problems - Algorithmic & Static References

1. Award: 1.00 point 2. Award: 1.00 point 3. Award: 1.00 point 4. Award: 1.00 point Which of the following is or are not a characteristic(s) of a money market instrument? Liquidity only Marketability only Long maturity only Liquidity premium only Long maturity and liquidity premium Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums. References Multiple Choice Diﬃculty: 1 Basic The money market is a subsector of the: commodity market. capital market. derivatives market. equity market. None of the options are correct. Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums. References Multiple Choice Diﬃculty: 1 Basic Treasury Inﬂation-Protected Securities (TIPS): pay a fixed interest rate for life. pay a variable interest rate that is indexed to inﬂation but maintain a constant principal. provide a variable stream of income in real (inﬂation-adjusted) dollars. have their principal adjusted inversely to the Consumer Price Index. provide a constant stream of income in real (inﬂation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index. TIPS provide a constant stream of income in real (inﬂation-adjusted) dollars because their principal is adjusted in proportion to the Consumer Price Index. References Multiple Choice Diﬃculty: 1 Basic Which one of the following is not a money market instrument? Treasury bill Negotiable certificate of deposit Commercial paper Treasury bond Eurodollar account Money market instruments are instruments with maturities of one year or less, which applies to all of the options except Treasury bonds. References Multiple Choice Diﬃculty: 1 Basic                        

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5. Award: 10.00 points 6. Award: 10.00 points 7. Award: 10.00 points 8. Award: 10.00 points T-bills are financial instruments initially sold by ________ to raise funds. commercial banks the U.S. government state and local governments agencies of the federal government the U.S. government and agencies of the federal government Only the U.S. government sells T-bills in the primary market. References Multiple Choice Diﬃculty: 1 Basic The bid price of a T-bill in the secondary market is: the price at which the dealer in T-bills is willing to sell the bill. the price at which the dealer in T-bills is willing to buy the bill. greater than the asked price of the T-bill. the price at which the investor can buy the T-bill. never quoted in the financial press. T-bills are sold in the secondary market via dealers; the bid price quoted in the financial press is the price at which the dealer is willing to buy the bill. References Multiple Choice Diﬃculty: 1 Basic In 2020, which of the following asset-backed securities had the largest value outstanding? Use Figure 2.7 . Automobile Student Loans Credit Card Equipment Treasury bills According to Figure 2.7, in 2020, Automobile-backed securities were the largest category of asset-backed securities outstanding. References Multiple Choice Diﬃculty: 1 Basic The smallest component of the fixed-income market is _______ debt. Use Figure 2.9 . Treasury other asset-backed corporate tax-exempt mortgage-backed According to Figure 2.9, other asset-backed debt is the smallest component of the fixed-income market. References Multiple Choice Diﬃculty: 1 Basic                        

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9. Award: 10.00 points 10. Award: 10.00 points 11. Award: 1.00 point 12. Award: 1.00 point The largest component of the fixed-income market is _______ debt. Use Figure 2.9 . Treasury asset-backed corporate tax-exempt mortgage-backed According to Figure 2.9 Treasury debt is the largest component of the fixed-income market. References Multiple Choice Diﬃculty: 1 Basic Which of the following is not a component of the money market? Repurchase agreements Eurodollars Real estate investment trusts Money market mutual funds Commercial paper Real estate investment trusts are not short-term investments. References Multiple Choice Diﬃculty: 1 Basic Commercial paper is a short-term security issued by ________ to raise funds. the Federal Reserve Bank commercial banks large, well-known companies the New York Stock Exchange state and local governments Commercial paper is short-term unsecured financing issued directly by large, presumably safe corporations. References Multiple Choice Diﬃculty: 1 Basic Which one of the following terms best describes Eurodollars? Dollar-denominated deposits only in European banks. Dollar-denominated deposits at branches of foreign banks in the U.S. Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S. Dollar-denominated deposits at American banks in the U.S. Dollars that have been exchanged for European currency. Although originally Eurodollars were used to describe dollar-denominated deposits in European banks, today the term has been extended to apply to any dollar-denominated deposit outside the U.S. References Multiple Choice Diﬃculty: 2 Intermediate                        

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13. Award: 10.00 points 14. Award: 10.00 points 15. Award: 1.00 point 16. Award: 1.00 point Deposits of commercial banks at the Federal Reserve Bank are called: bankers' acceptances. repurchase agreements. time deposits. federal funds. reserve requirements. The federal funds are required for the bank to meet reserve requirements, which is a way of inﬂuencing the money supply. No substitutes for fed funds are permitted. References Multiple Choice Diﬃculty: 1 Basic The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the: prime rate. discount rate. federal funds rate. call money rate. money market rate. The federal funds are required for the bank to meet reserve requirements, which is a way of inﬂuencing the money supply. References Multiple Choice Diﬃculty: 1 Basic Which of the following statements are true regarding municipal bonds? I. A municipal bond is a debt obligation issued by state or local governments. II. A municipal bond is a debt obligation issued by the federal government. III. The interest income from a municipal bond is exempt from federal income taxation. IV. The interest income from a municipal bond is exempt from state and local taxation in the issuing state. I and II only I and III only I, II, and III only I, III, and IV only I and IV only State and local governments and agencies thereof issue municipal bonds on which the interest income is free from all federal taxes and is exempt from state and local taxation in the issuing state. References Multiple Choice Diﬃculty: 2 Intermediate Which of the following statements is true regarding a corporate bond? A corporate callable bond gives the holder the right to exchange it for a specified number of the company's common shares. A corporate debenture is a secured bond. A corporate indenture is a secured bond. A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares. Holders of corporate bonds have voting rights in the company. "A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares" is the only true statement; all other statements describe something other than the term specified. References Multiple Choice Diﬃculty: 1 Basic                        

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17. Award: 1.00 point 18. Award: 1.00 point 19. Award: 10.00 points 20. Award: 1.00 point In the event of the firm's bankruptcy, the most shareholders can lose is their original investment in the firm's stock. common shareholders are the first in line to receive their claims on the firm's assets. bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders. the claims of preferred shareholders are honored before those of the common shareholders. the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders. Shareholders have limited liability and have residual claims on assets. Bondholders have a priority claim on assets, and preferred shareholders have priority over common shareholders. References Multiple Choice Diﬃculty: 2 Intermediate Which of the following is true regarding a firm's securities? Common dividends are paid before preferred dividends. Preferred stockholders have voting rights. Preferred dividends are usually cumulative. Preferred dividends are contractual obligations. Common dividends can usually be paid if preferred dividends have been skipped. Preferred dividends must be paid first and any skipped preferred dividends must be paid before common dividends may be paid. References Multiple Choice Diﬃculty: 1 Basic Which of the following is true of the Dow Jones Industrial Average? It is a value-weighted average of 30 large industrial stocks. It is a price-weighted average of 30 large industrial only stocks. It is a value-weighted average of 30 large industrial stocks, and the divisor is not adjusted for stock splits. It is a value-weighted average of 30 large industrial stocks, and the divisor must be adjusted for stock splits. It is a price-weighted average of 30 large blue-chip stocks, and the divisor must be adjusted for stock splits. The Dow Jones Industrial Average is a price-weighted index of 30 large blue-chip firms, and the divisor must be adjusted when any of the stocks on the index split. References Multiple Choice Diﬃculty: 1 Basic Which of the following indices is(are) market-value weighted? I. The New York Stock Exchange Composite Index II. The Standard and Poor's 500 Stock Index III. The Dow Jones Industrial Average I only I and II only I and III only I, II, and III II and III only The Dow Jones Industrial Average is a price-weighted index. References Multiple Choice Diﬃculty: 2 Intermediate                        

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21. Award: 1.00 point 22. Award: 10.00 points 23. Award: 10.00 points The Dow Jones Industrial Average (DJIA) is computed by: adding the prices of 30 large "blue-chip" stocks and dividing by 30. calculating the total market value of the 30 firms in the index and dividing by 30. adding the prices of the 30 stocks in the index and dividing by a divisor. adding the prices of the 500 stocks in the index and dividing by a divisor. adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period. When the DJIA became a 30-stock index, it was computed by adding the prices of 30 large "blue-chip" stocks and dividing by 30; however, as stocks on the index have split and been replaced, the divisor has been adjusted. References Multiple Choice Diﬃculty: 1 Basic Consider the following three stocks: Stock Price Number of shares outstanding Stock A $ 40 200 Stock B $ 70 500 Stock C $ 10 600 The price-weighted index constructed with the three stocks is: 30. 40. 50. 60. 70. ($40 + $70 + $10) ÷ 3 = $40. References Multiple Choice Diﬃculty: 1 Basic Consider the following three stocks: Stock Price Number of shares outstanding Stock A $ 40 200 Stock B $ 70 500 Stock C $ 10 600 The value-weighted index constructed with the three stocks using a divisor of 100 is: 1.2. 1200. 490. 4900. 49. The sum of the value of the three stocks divided by 100 is 490: [($40 × 200) + ($70 × 500) + ($10 × 600)] ÷ 100 = 490. References Multiple Choice Diﬃculty: 2 Intermediate                  

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24. Award: 10.00 points 25. Award: 10.00 points 26. Award: 10.00 points 27. Award: 10.00 points Consider the following three stocks: Stock Price Number of shares outstanding Stock A $ 40 200 Stock B $ 70 500 Stock C $ 10 600 Assume at these prices that the value-weighted index constructed with the three stocks is 490. What would the index be if stock B is split 2 for 1 and stock C 4 for 1? 265 430 355 490 1000 Value-weighted indexes are not affected by stock splits. References Multiple Choice Diﬃculty: 2 Intermediate The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.250 and a bid price of 104.125. If the treasury bonds have a par value of $1,000. As a buyer of the bond, what is the dollar price you expect to pay? $1,048.00 $1,042.50 $1,044.00 $1,041.25 $1,040.40 You pay the asking price of the dealer: 104.25% of $1,000, or $1,042.50. References Multiple Choice Diﬃculty: 2 Intermediate The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 104.250 and a bid price of 104.125. If the treasury bonds have a par value of $1,000. As a seller of the bond, what is the dollar price you expect to receive? $1,048.00 $1,042.50 $1,041.25 $1,041.75 $1,040.40 You receive the bid price of the dealer: 104.125% of $1,000, or $1,041.25. References Multiple Choice Diﬃculty: 1 Basic An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 22% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________and ________, respectively. 8%; 10% 8%; 7.8% 6.4%; 8% 6.4%; 10% 10%; 10% r c = 0.10(1 − 0.22) = 0.078, or 7.8%; r m = 0.08(1 − 0) = 8%. References Multiple Choice Diﬃculty: 2 Intermediate                        

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28. Award: 10.00 points 29. Award: 10.00 points 30. Award: 10.00 points 31. Award: 1.00 point An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.3%, respectively. If the investor is in the 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. 7.5%; 10.3% 7.5%; 7.83% 5.63%; 7.73% 5.63%; 10.3% 10%; 10% r c = 0.103 × (1 − 0.24) = 0.0783, or 7.83%; r m = 0.075 × (1 − 0) = 7.5%. References Multiple Choice Diﬃculty: 2 Intermediate An investor purchases one municipal and one corporate bond that pay rates of return of 7.5% and 10.0%, respectively. If the investor is in the 20% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ________, respectively. 7.5%; 12.0% 7.5%; 8.0% 5.63%; 12.0% 5.63%; 8.0% 10%; 10% r c = 0.100 × (1 − 0.20) = 0.0800, or 8.00%; r m = 0.075 × (1 − 0) = 7.5%. References Multiple Choice Diﬃculty: 2 Intermediate What marginal tax bracket would suggest indifference between corporate bonds (yielding 10%) and municipal bonds (yielding 8%)? 0% 20% 21% 25% Unable to determine given the information provided. r c = 0.100 × (1 − t ) = 0.0800 = r m t = 0.20 References Multiple Choice Diﬃculty: 1 Basic In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs: by adjusting the divisor. automatically. by adjusting the numerator. quarterly on the last trading day of each quarter. The calculation of the value-weighted S&P indices includes both price and number of shares of each of the stocks in the index. Thus, the effects of stock splits are automatically incorporated into the calculation. References Multiple Choice Diﬃculty: 1 Basic                       

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32. Award: 1.00 point 33. Award: 10.00 points 34. Award: 10.00 points 35. Award: 10.00 points Which of the following statements regarding the Dow Jones Industrial Average (DJIA) is false ? The DJIA is not very representative of the market as a whole. The DJIA consists of 30 blue chip stocks. The DJIA is affected equally by changes in low- and high-priced stocks. The DJIA divisor needs to be adjusted for stock splits. The value of the DJIA is much higher than individual stock prices. The high-priced stocks have much more impact on the DJIA than do the lower-priced stocks. References Multiple Choice Diﬃculty: 1 Basic The index that includes the largest number of actively-traded stocks is: the NASDAQ Composite Index. the NYSE Composite Index. the Wilshire 5000 Index. the Value Line Composite Index. the Russell Index. The Wilshire 5000 is the largest readily available stock index, consisting of the stocks traded on the organized exchanges and the OTC stocks. References Multiple Choice Diﬃculty: 1 Basic A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of: 8.46%. 10.75%. 12.40%. 3.58%. 0.072 = r (1 − t ); 0.072 = r (0.67); r = 0.072 ÷ 0.67; r = 0.1075 = 10.75%. References Multiple Choice Diﬃculty: 2 Intermediate If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? The stock trading at the highest dollar price per share The stock having the greatest amount of debt in its capital structure The stock having the greatest amount of equity in its capital structure The stock having the lowest volatility Higher-priced stocks affect the DJIA more than lower-priced stocks; other choices are not relevant. References Multiple Choice Diﬃculty: 2 Intermediate                      

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36. Award: 10.00 points 37. Award: 10.00 points 38. Award: 1.00 point 39. Award: 10.00 points The stocks on the Dow Jones Industrial Average: have remained unchanged since the creation of the index. include most of the stocks traded on the NYSE. are changed occasionally as circumstances dictate. consist of stocks on which the investor cannot lose money. include most of the stocks traded on the NYSE and are changed occasionally as circumstances dictate. The stocks on the DJIA are only a small sample of the entire market and have been changed occasionally since the creation of the index; one can lose money on any stock. References Multiple Choice Diﬃculty: 1 Basic Federally-sponsored agency debt: is legally insured by the U.S. Treasury. would probably be backed by the U.S. Treasury in the event of a near-default. has a small positive yield spread relative to U.S. Treasuries. would probably be backed by the U.S. Treasury in the event of a near-default and has a small positive yield spread relative to U.S. Treasuries. is legally insured by the U.S. Treasury and has a small positive yield spread relative to U.S. Treasuries. Federally sponsored agencies are not government owned. These agencies' debt is not insured by the U.S. Treasury, but probably would be backed by the Treasury in the event of an agency near-default. As a result, the issues are very safe and carry a yield only slightly higher than that of U.S. Treasuries. References Multiple Choice Diﬃculty: 1 Basic Brokers' calls: are funds used by individuals who wish to sell stocks on margin. are funds borrowed by the broker from the bank, with no formal agreement to repay the bank immediately if requested to do so. carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills. are funds used by individuals who wish to buy stocks on margin and are funds borrowed by the broker from the bank with the agreement to repay the bank immediately if requested to do so. are funds used by individuals who wish to buy stocks on margin and carry a rate that is usually about one percentage point lower than the rate on U.S. T-bills. Brokers' calls are funds borrowed from banks by brokers and loaned to investors in margin accounts. References Multiple Choice Diﬃculty: 1 Basic A form of short-term borrowing by dealers in government securities is (are): reserve requirements. repurchase agreements. bankers' acceptances. commercial paper. brokers' calls. Repurchase agreements are a form of short-term borrowing, where a dealer sells government securities to an investor with an agreement to buy back those same securities at a slightly higher price. References Multiple Choice Diﬃculty: 1 Basic                        

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40. Award: 10.00 points 41. Award: 10.00 points 42. Award: 10.00 points 43. Award: 10.00 points Which of the following securities is a money market instrument? Treasury note Treasury bond Municipal bond Commercial paper Mortgage security Only commercial paper is a money market security. The others are capital market instruments. References Multiple Choice Diﬃculty: 1 Basic The yield to maturity reported in the financial pages for Treasury securities: is calculated by compounding the semiannual yield. is calculated by halving the semiannual yield. is also called the security equivalent yield. is calculated as the yield-to-call for premium bonds. is calculated by doubling the semiannual yield and is also called the bond equivalent yield. The yield to maturity shown in the financial pages is an APR calculated by doubling the semiannual yield. References Multiple Choice Diﬃculty: 1 Basic Which of the following is not a mortgage-related government or government-sponsored agency? The Federal Home Loan Bank The Federal National Mortgage Association The U.S. Treasury Freddie Mac Ginnie Mae Only the U.S. Treasury issues securities that are not mortgage-backed. References Multiple Choice Diﬃculty: 1 Basic For you to be indifferent between the after-tax returns on a corporate bond paying 8.50% and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be? 33% 72% 15% 28% Cannot be determined from the information given. 0.0612 = 0.085(1 − t ); (1 − t ) = 0.72; t = 0.28. References Multiple Choice Diﬃculty: 2 Intermediate                        

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44. Award: 10.00 points 45. Award: 10.00 points 46. Award: 10.00 points 47. Award: 10.00 points What does the term negotiable mean, regarding negotiable certificates of deposit? The CD can be sold to another investor if the owner needs to cash it in before its maturity date. The rate of interest on the CD is subject to negotiation. The CD is automatically reinvested at its maturity date. The CD has staggered maturity dates built in. The interest rate paid on the CD will vary with a designated market rate. Negotiable means that it can be sold or traded to another investor. References Multiple Choice Diﬃculty: 1 Basic Freddie Mac and Ginnie Mae were organized to provide: a primary market for mortgage transactions. liquidity for the mortgage market. a primary market for farm loan transactions. liquidity for the farm loan market. a source of funds for government agencies. Liquidity for the mortgage market. References Multiple Choice Diﬃculty: 1 Basic The type of municipal bond that is used to finance commercial enterprises, such as the construction of a new building for a corporation, is called: a corporate courtesy bond. a revenue bond. a general-obligation bond. a tax-anticipation note. an industrial development bond. Industrial development bonds allow private enterprises to raise capital at lower rates. References Multiple Choice Diﬃculty: 1 Basic Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni? 15.4% 23.7% 39.5% 17.3% 12.4% t m = 1 − (5.93% ÷ 7.17%) = 17.3%. References Multiple Choice Diﬃculty: 2 Intermediate                        

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48. Award: 10.00 points 49. Award: 10.00 points 50. Award: 10.00 points 51. Award: 10.00 points Which of the following are typical characteristics of preferred stock? I. It pays its holder a fixed amount of income each year at the discretion of its managers. II. It gives its holder voting power in the firm. III. Its dividends are usually cumulative. IV. Failure to pay dividends may result in bankruptcy proceedings. I, III, and IV I, II, and III I and III I, II, and IV I, II, III, and IV Only I and III are true. References Multiple Choice Diﬃculty: 2 Intermediate Bond market indexes can be diﬃcult to construct because: they cannot be based on firms' market values. bonds tend to trade infrequently, making price information diﬃcult to obtain. there are so many kinds of bonds. prices cannot be obtained for companies that operate in emerging markets. corporations are not required to disclose the details of their bond issues. Bond trading is often "thin," making prices stale (or not current). References Multiple Choice Diﬃculty: 2 Intermediate Regarding a futures contract, the long position is held by: the trader who bought the contract at the largest discount. the trader who must travel the farthest distance to deliver the commodity. the trader who plans to hold the contract open for the lengthiest time period. the trader who commits to purchasing the commodity on the delivery date. the trader who commits to delivering the commodity on the delivery date. The trader agreeing to buy the underlying asset is said to be long the contract, whereas the trader agreeing to deliver the underlying asset is said to be short the contract. References Multiple Choice Diﬃculty: 1 Basic For you to be indifferent between the after-tax returns on a corporate bond paying 9% and a tax-exempt municipal bond paying 7%, what would your tax bracket need to be? 17.6% 27.9% 22.2% 19.8% Cannot be determined from the information given. 0.07 = 0.09 × (1 − t ); (1 − t ) = 0.777; t = 0.222. References Multiple Choice Diﬃculty: 2 Intermediate                        

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52. Award: 10.00 points 53. Award: 10.00 points 54. Award: 10.00 points 55. Award: 10.00 points For you to be indifferent between the after-tax returns on a corporate bond paying 7% and a tax-exempt municipal bond paying 5.5%, what would your tax bracket need to be? 22.6% 21.4% 26.2% 19.8% Cannot be determined from the information given. 0.055 = 0.07 × (1 − t ); (1 − t ) = 0.786; t = 0.214. References Multiple Choice Diﬃculty: 2 Intermediate An investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be _________ and _______, respectively. 6%; 8% 4.5%; 6% 4.5%; 8% 6%; 6.08% r c = 0.08 × (1 − 0.24) = 0.0608, or 6%; r m = 0.06(1 − 0) = 6%. References Multiple Choice Diﬃculty: 2 Intermediate An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 12% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. 7.20%; 9.10% 7.20%; 8.01% 6.12%; 7.74% 8.47%; 9.10% r c = 0.091 × (1 − 0.12) = 0.0801, or 8.01%; r m = 0.072 × (1 − 0) = 7.2%. References Multiple Choice Diﬃculty: 2 Intermediate For a taxpayer in the 24% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of: 7.24%. 10.75%. 5.50%. 4.13%. 0.055 = r × (1 − t ); r = 0.055 ÷ 0.76; r = 0.0724. References Multiple Choice Diﬃculty: 2 Intermediate                     

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56. Award: 10.00 points 57. Award: 10.00 points 58. Award: 10.00 points 59. Award: 10.00 points For a taxpayer in the 12% marginal tax bracket, a 15-year municipal bond currently yielding 6.2% would offer an equivalent taxable yield of: 6.20%. 5.27%. 8.32%. 7.05%. 0.062 = r × (1 − t ); r = 0.062 ÷ (0.88); r = 0.0705 = 7.05%. References Multiple Choice Diﬃculty: 2 Intermediate Regarding a futures contract, the short position is held by: the trader who bought the contract at the largest discount. the trader who must travel the farthest distance to deliver the commodity. the trader who plans to hold the contract open for the lengthiest time period. the trader who commits to purchasing the commodity on the delivery date. the trader who commits to delivering the commodity on the delivery date. The trader agreeing to buy the underlying asset is said to be long the contract, whereas the trader agreeing to deliver the underlying asset is said to be short the contract. References Multiple Choice Diﬃculty: 1 Basic A call option allows the buyer to: sell the underlying asset at the exercise price on or before the expiration date. buy the underlying asset at the exercise price on or before the expiration date. sell the option in the open market prior to expiration. sell the underlying asset at the exercise price on or after the expiration date and sell the option in the open market prior to expiration. buy the underlying asset at the exercise price on or after the expiration date and sell the option in the open market prior to expiration. A call option may be exercised (allowing the holder to buy the underlying asset) on or before expiration. References Multiple Choice Diﬃculty: 1 Basic A put option allows the holder to: buy the underlying asset at the strike price on or before the expiration date. sell the underlying asset at the strike price on or before the expiration date. sell the option in the open market prior to expiration. sell the underlying asset at the strike price on or after the expiration date and sell the option in the open market prior to expiration. buy the underlying asset at the strike price on or after the expiration date and sell the option in the open market prior to expiration. A put option allows the buyer to sell the underlying asset at the strike price on or before the expiration date. References Multiple Choice Diﬃculty: 1 Basic                       

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60. Award: 10.00 points 61. Award: 10.00 points 62. Award: 10.00 points 63. Award: 10.00 points The _____ index represents the performance of the German stock market. DAX FTSE Nikkei Hang Seng Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). References Multiple Choice Diﬃculty: 1 Basic The _____ index represents the performance of the Japanese stock market. DAX FTSE Nikkei Hang Seng Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). References Multiple Choice Diﬃculty: 1 Basic The _____ index represents the performance of the U.K. stock market. DAX FTSE Nikkei Hang Seng Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). References Multiple Choice Diﬃculty: 1 Basic The _____ index represents the performance of the Hong Kong stock market. DAX FTSE Nikkei Hang Seng Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). References Multiple Choice Diﬃculty: 1 Basic                    

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64. Award: 10.00 points 65. Award: 10.00 points 66. Award: 10.00 points 67. Award: 10.00 points The _____ index represents the performance of the Canadian stock market. DAX FTSE TSX Hang Seng Many major foreign stock markets exist, including the DAX (Germany), FTSE (UK), Nikkei (Japan), Hang Seng (Hong Kong), and TSX (Canada). References Multiple Choice Diﬃculty: 1 Basic The ultimate stock index in the U.S. is the: Wilshire 5000. DJIA. S&P 500. Russell 2000. The Wilshire 5000 is the broadest U.S. index and contains more than 7000 stocks. References Multiple Choice Diﬃculty: 1 Basic The _____ is an example of a U.S. index of only large firms. Wilshire 5000 DJIA DAX Russell 2000 All of the options are correct. The DJIA contains 30 of some of the largest firms in the U.S. References Multiple Choice Diﬃculty: 1 Basic The _____ is an example of a U.S. index of small firms. S&P 500 DJIA DAX Russell 2000 All of the options are correct. The Russell 2000 is a small firm index. The DJIA and S&P 500 are large firm U.S. indexes and the DAX is a large German firm index. References Multiple Choice Diﬃculty: 1 Basic                      

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68. Award: 10.00 points 69. Award: 10.00 points 70. Award: 10.00 points 71. Award: 10.00 points Certificates of deposit are insured by the: SPIC. CFTC. Lloyds of London. FDIC. All of the options are correct. The Federal Deposit Insurance Corporation (FDIC) insures saving deposits for up to $250,000. References Multiple Choice Diﬃculty: 1 Basic Certificates of deposit are insured for up to ____________ in the event of bank insolvency. $10,000 $100,000 $250,000 $500,000 The Federal Deposit Insurance Corporation (FDIC) insures saving deposits for up to $250,000. References Multiple Choice Diﬃculty: 1 Basic The maximum maturity of commercial paper that can be issued without SEC registration is: 270 days. 180 days. 90 days. 30 days. The SEC permits issuing commercial paper for a maximum of 270 days without registration. References Multiple Choice Diﬃculty: 1 Basic Which of the following is used extensively in foreign trade when the creditworthiness of one trader is unknown to the trading partner? Repos Bankers' acceptances Eurodollars Federal funds Yankee bonds A bankers' acceptance facilitates foreign trade by substituting a bank's credit for that of the trading partner. References Multiple Choice Diﬃculty: 1 Basic                      

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72. Award: 10.00 points 73. Award: 10.00 points 74. Award: 10.00 points 75. Award: 10.00 points A U.S. dollar-denominated bond that is sold in Singapore is a(n): Eurobond. Yankee bond. Samurai bond. Formosa bond. Malay bond. Eurobonds are bonds denominated in a currency other than the currency of the country in which they are issued. References Multiple Choice Diﬃculty: 1 Basic A municipal bond issued to finance an airport, hospital, turnpike, or port authority is typically a: revenue bond. general-obligation bond. industrial-development bond. revenue bond or general-obligation bond. Revenue bonds depend on revenues from the project to pay the coupon payment and are normally issued for airports, hospitals, turnpikes, or port authorities. General obligation bonds are backed by the taxing power of the municipality. Industrial development bonds are used to support private enterprises. References Multiple Choice Diﬃculty: 1 Basic Unsecured bonds are called: junk bonds. indebentures. indentures. subordinated secured debentures. either debentures or subordinated debentures. Debentures are unsecured bonds. References Multiple Choice Diﬃculty: 1 Basic A bond that can be retired prior to maturity by the issuer is a(n) ____________ bond. convertible secured unsecured callable Yankee Only callable bonds can be retired prior to maturity. References Multiple Choice Diﬃculty: 1 Basic                       

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76. Award: 10.00 points 77. Award: 10.00 points 78. Award: 10.00 points 79. Award: 10.00 points Corporations can exclude ___________% of the dividends received from preferred stock from taxes. 50 70 20 15 62 Corporations can exclude 50% of dividends received from preferred stock from taxes. References Multiple Choice Diﬃculty: 1 Basic You purchased a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss? Note: Assume prices are quoted in cents per bushel. $2.00 − $2.00 $100 − $100 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was ($3.52 − $3.50) = $0.02 per bushel, or $0.02 × 5,000 = $100. References Multiple Choice Diﬃculty: 1 Basic You purchased a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss? Note: Assume prices are quoted in cents per bushel. − $12.00 $12.00 − $600 $600 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was ($3.43 − $3.31) = $0.12 per bushel, or $0.12 × 5,000 = $600. References Multiple Choice Diﬃculty: 1 Basic You sold a futures contract on corn at a futures price of 350, and at the time of expiration, the price was 352. What was your profit or loss? Note: Assume prices are quoted in cents per bushel. $2.00 − $2.00 $100 − $100 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($3.50 − $3.52) = − $0.02 per bushel, or − $0.02 × 5,000 = − $100. References Multiple Choice Diﬃculty: 1 Basic                     

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80. Award: 10.00 points 81. Award: 10.00 points 82. Award: 10.00 points 83. Award: 10.00 points You sold a futures contract on corn at a futures price of 331, and at the time of expiration, the price was 343. What was your profit or loss? Note: Assume prices are quoted in cents per bushel. − $12.00 $12.00 − $600 $600 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($3.31 − $3.43) = − $0.12 per bushel, or − $0.12 × 5,000 = − $600. References Multiple Choice Diﬃculty: 1 Basic You purchased a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss? Note: Assume prices are quoted in cents per bushel. $1,375.00 − $1,375.00 − $27.50 $27.50 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your profit was ($2.6125 − $2.3375) = $0.275 per bushel, or $0.275 × 5,000 = $1,375. References Multiple Choice Diﬃculty: 1 Basic You sold a futures contract on oats at a futures price of 233.75, and at the time of expiration, the price was 261.25. What was your profit or loss? Note: Assume prices are quoted in cents per bushel. $1,375.00 − $1,375.00 − $27.50 $27.50 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($2.3375 − $2.6125) = − $0.275 per bushel, or − $0.275 × 5,000 = − $1,375. References Multiple Choice Diﬃculty: 1 Basic What short term interest rate was proposed to be phased out by 2021? SONIA LIBOR Tokyo Interbank rate Euribor US Treasury Repo References Multiple Choice Diﬃculty: 1 Basic                     

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84. Award: 10.00 points 85. Award: 10.00 points 86. Award: 10.00 points 87. Award: 10.00 points What interest rate have British regulators proposed be the new short term benchmark rate? SONIA LIBOR Tokyo Interbank rate Euribor US Treasury Repo References Multiple Choice Diﬃculty: 1 Basic What interest rate have US regulators proposed be the new short term benchmark rate? SONIA LIBOR Tokyo Interbank rate Euribor US Treasury Repo References Multiple Choice Diﬃculty: 1 Basic A corporate bond is listed in the Wall Street Journal and shows an ask price of 98.62. If the corporate bonds have a par value of $1,000, what dollar amount should a buyer expect to pay? $98.62 $986.20 $1,000.00 $1,081.25 $1,140.40 You pay $1,000 × 0.9862 = $986.20 References Multiple Choice Diﬃculty: 1 Basic An investor pays $104,280 for a treasury bond. The price listed in the Wall Street Journal show as the ask price will be _________. 98.20 100.00 104.28 106.33 108.00 The price listed will be ($104,280 ÷ $100,000) × 100 = 104.28 References Multiple Choice Diﬃculty: 1 Basic                        

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Chapter 02

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