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fundamentals of investments valuation
Questions and Answers of
Fundamentals Of Investments Valuation
Suppose you buy one SPX option contract with a strike of 1300. At maturity, the S&P 500 index is at 1350. What is you net gain or loss if the premium you paid was $20?
How many options contracts on Milson stock were traded with an expiration date of July? How many underlying shares of stock do these options contracts represent?
Recall the options strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would
According to put-call parity, a risk-free portfolio is formed by buying 100 stock shares and a. b. C. d. writing one call contract and buying one put contract buying one call contract and writing one
In the Black-Scholes-Merton option pricing model, the value of an option contract is a function of six input factors. Which of the following is not one of these factors? a. b. PSJP C. d. the price of
In the Black-Scholes option valuation formula, an increase in a stock's volatility: a. increases the associated call option value b. C. d. decreases the associated put option value increases or
Which of the following variables influence the value of options? a. b. C. d. I. level of interest rates II. time to expiration of the option III. dividend yield of underlying stock IV. stock price
Which of the following factors does not influence the market price of options on a common stock? a. b. C. d. expected return on the underlying stock volatility of the underlying stock relationship
Which one of the following will increase the value of a call option? a. b. C. d. an increase in interest rates a decrease in time to expiration of the call a decrease in the volatility of the
Which one of the following would tend to result in a high value of a call option? a. b. C. d. interest rates are low the variability of the underlying stock is high there is little time remaining
Which of the following incorrectly states the signs of the impact of an increase in the indicated input factor on call and put option prices? Call Put underlying stock price a. risk-free interest
Which of the following incorrectly states the signs of the impact of an increase in the indicated input factor on call and put option prices? a. b. C. d. strike price of the option contract time
Which of the following measures the impact of a change in the stock price on an option price? a. b. vega rho C. delta d. theta
Which of the following measures the impact of a change in time remaining until option expiration on an option price? a. b. vega rho C. delta d. theta
Which of the following measures the impact of a change in the underlying stock price volatility on an option price? a. b. vega rho c. delta d. theta
Which of the following measures the impact of a change in the interest rate on an option price? vega b. rho C. delta d. theta
You wish to hedge a stock portfolio, where the portfolio beta is .5, the portfolio value is $10 million, the hedging index call option delta is .5, and the hedging index call option contract value is
How do dividend yields affect option prices? Explain.
A put and a call option have the same maturity and strike price. If they also have the same price, which one is in the money?
One thing the put-call parity equation tells us that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three. For example, how can
What is the difference between an option's delta and its eta? Suppose a call option has an eta of 12. If the underlying stock rises from \($100\) to \($102,\) what will be impact on the option's
Vega What does an option's vega tell us? Suppose a put option with a vega of .60) sells for $12.00. If the underlying volatility rises from 50 to 51 percent, what will happen to the put's value?
American Options A well-known result in option pricing theory is that it will never pay to exercise a call option on a non-dividend-paying stock before expiration. Why do you suppose this is so?
A call option has a price of \($2.57.\) The underlying stock price, strike price, and dividend yield are \($100,\) \($120,\) and 3 percent, respectively. The option has 100 days to expiration, and
Suppose you have a stock market portfolio with a beta of 1.4 that is currently worth $150 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and
Using an options calculator, calculate the price and the following "greeks" for a call and a put option with one year to expiration: delta, gamma, rho, eta, vega, and theta. The stock price is $80,
Suppose you purchase 10 orange juice contracts today at the settle price of $1 per pound. How much do these 10 contracts cost you? If the settle price is lower tomorrow by two cents per pound, how
Suppose a futures contract exists on Microsoft stock, which is currently selling at $200 per share. The contract matures in two months, the risk-free rate is 5 percent annually. The current dividend
Which of the following is not specified by a stock option contract? a. b. C. d. price of the underlying stock contract size exercise style contract settlement procedure
A July 50 call option contract for YXZ stock is identified by which ticker symbol? a. YXZ-JG b. YXZ-JS C. YXZ-GJ d. YXZ-SJ
An April 40 put option contract for YXZ stock is identified by which ticker symbol? a. YXZ-HD b. YXZ-HP C. YXZ-DH d. YXZ-PH
Which of the following stock option strategies has the potential for the largest loss? a. b. C. writing a covered call writing a covered put writing a naked call d. writing a naked put
Which statement describes an at-the-money protective put position (comprised of owning the stock and the put? a. b. c. d. protects against loss at any stock price below the strike price of the put
Which of the following yields a defensive/protective strategy? buying a put on stock you currently own a. writing a naked put b. c. d. writing a call against stock you currently hold short buying a
Investor A uses options for defensive and income reasons. Investor B uses options as an aggressive investment strategy. What is an appropriate use of options for Investors A and B respectively? a. b.
How is a long straddle position constructed? a. b. c. d. write a call and write a put buy a call and buy a put write a call and buy a put buy a call and write a put
Which is the riskiest options transaction if the underlying stock price is expected to increase substantially? a. b. C. d. writing a naked call writing a naked put buying a call buying a put
You create a "strap" by buying two calls and one put on ABC stock, all with a strike price of \($45.\) The calls cost \($5\) each, and the put costs \($4.\) If you close your position when ABC stock
Which of the following strategies is most suitable for an investor wishing to eliminate "downside" risk from a stock? a. b. C. d. long straddle short straddle covered call protective put
What is the ticker symbol for the S&P 100 index? P a. SPC b. SPM d. PP SPX OEX
What is the ticker symbol for the S&P 500 index? a. SPC b. SPM C. SPX d. OEX
What is the monthly payment on a 30-year fixed rate mortgage if the original balance is $180,000 and the rate is 8 percent?
If a mortgage has monthly payments of $1,000, a life of 30 years, and a rate of 6 percent per year, what is the mortgage amount?
A 30-year $140,000 mortgage has a rate of 8 percent. What are the interest and principal portions in the first payment? In the second?
Consider a 30-year $200,000 mortgage with 6.5 percent interest rate. After 10 years, the borrower (the mortgage issuer) pays it off. How much will the lender receive?
Consider a 15-year $120,000 mortgage with a rate of 9 percent. Eight years into the mortgage, rates have fallen to 6 percent. What would be the monthly saving to a homeowner from refinancing the
Evaluate the following argument: "Prepayment is not a risk to mortgage investors because prepayment actually means that the investor is paid both in full and ahead of schedule." Is it always true or
Consider a 30-year \($140,000\) mortgage with a rate of 6.375 percent. Five years into the mortgage, rates have fallen to 6 percent. Suppose the transaction cost of obtaining a new mortgage is
What are the conditional prepayment rates for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages? How do you interpret these numbers?
What is the single month mortality for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages? How do you interpret these numbers?
Why is Macaulay duration an inadequate measure of interest rate risk for an MBS?
Suppose you purchase 15 call contracts on Scholes Co. stock. The strike price is \($220,\) and the premium is \($10.\) If the stock is selling for \($240\) per share at expiration, what are your call
Stock in Black Manufacturing is currently priced at \($90\) per share. A call option with a \($90\) strike and 60 days to maturity is quoted at \($5.\) Compare the percentage gains and losses from a
What is the yield to maturity (YTM) on a zero-coupon bond? a. b. C. d. the interest rate realized if the bond is held to maturity the interest rate realized when the bond is sold the coupon yield for
The coupon rate for a Treasury note is set a. b. c. the same for all Treasury note issues by a formula based on the size of the Treasury note issue according to prevailing interest rates at time of
What is the dollar value of a U.S. Treasury bond quoted at 92:24? a. $922.75 b. C. d. $922.40 $927.50 indeterminable
Treasury bills are sold on a discount basis, meaning that the difference between their issued price and their redemption value is a. b. C. d. the same for all T-bill issues the imputed interest on
Which of the following statements about single-price Treasury auctions is false? a, b. PRIN C. d. competitive bidders pay the stop-out bid non-competitive bidders pay the stop-out bid plus a small
The interest rate on Series I Savings Bonds is reset every six months as 90 percent of the rate on newly issued 5-year T-notes plus the recent inflation rate a. 90 percent of the rate on newly issued
Which statement applies to a bond issued by an agency of the U.S. Government? it becomes a direct obligation of the U.S. Treasury in case of default a. it is exempt from the federal income tax on
Which is true for bonds issued by all agencies of the U.S. government? a. b. C. d. they become direct obligations of the U.S. Treasury they are secured bonds backed by government holdings they are
Which of the following constitutes the bulk of all outstanding municipal bonds? a. b. C. d. revenue bonds general obligation bonds moral obligation bonds private activity bonds
A revenue bond is distinguished from a general obligation bond in that revenue bonds have which of the following characteristics? a. b. c. d. they are issued by counties, special districts, cities,
Which of the following is not a method used by municipal bond insurers to manage default risk? a. R b. PP C. d. only insure bonds from municipalities with a good credit rating diversify default risk
Which one of the following generally is not true of an insured municipal bond? a. b. C. d. The price on an insured bond is higher than that on an otherwise identical uninsured bond The insurance can
A municipal bond carries a coupon of 6 3/4 percent and is trading at par To a taxpayer in the 34 percent tax bracket, what would the taxable equivalent yield of this bond be? a. b. 4.5 percent 10.2
A 20-year municipal bond is currently priced at par to yield 5.53 percent. For a taxpayer in the 33 percent tax bracket, what equivalent taxable yield would this bond offer? a. b. C. d. 8.25 percent
The coupon rate on a tax-exempt bond is 5.6 percent, and the coupon rate on a taxable bond is 8 percent. Both bonds sell at par. At what tax bracket (marginal tax rate) would an investor be
What two Treasury securities are zeroes?
In the context of the muni market, what are variable rate notes? What is likely true about their risks as compared to those of ordinary issues?
What is a private activity muni? What type of investor would be interested?
A Treasury issue is quoted at 127:23 bid and 127:25 ask. What is the least you could pay to acquire a bond?
A noncallable Treasury bond has a quoted yield of 6.4 percent. It has a 6 percent coupon and 12 years to maturity. What is its price?
In Figure 12.2, locate the Treasury bond with the longest maturity (this is the so-called bellwether bond). Verify that, given the ask price, the reported yield is correct.
Examine the yields on the callable issues in Figure 12.2 that mature in 2014. Why do think the yields are so much smaller than those reported for the noncallable issues maturing in 2015?
A taxable corporate issue yields 7 percent. For an investor in a 28 percent tax bracket, what is the equivalent aftertax yield?
For a callable agency bond selling above par, is it necessarily true that the yield to call will be less than the yield to maturity? Why or why not?
Locate the callable bond with a final maturity of Nov 2014 in Figure 12.2. Verify that the reported yield is correct given the ask price of 154:21.
Which of the following statements about fixed rate mortgages is false? b. a. 15-year mortgages have higher monthly payments than 30-year mortgages scheduled monthly payments are constant over the
Mortgages in GNMA pools are said to be fully modified because GNMA guarantees bondholders which of the following? a. b. PSFA c. d. a minimum rate of retum on their investment a modified schedule of
Which of the following is not a source of risk for GNMA mortgage pool investors? a. b. C. d. prepayment risk default risk interest rate risk reinvestment risk
Which one of the following sets of features most accurately describes a GNMA mortgage pass-through security? Average Life a. Predictable Payment Frequency Monthly Credit Risk High b. Predictable
In contrast to original-issue U.S. Treasury securities, original-issue GNMA pass-through securities: a. b. C. provide quarterly payments to the investor. have a limited availability of maturities.
Which of the following should a bond portfolio manager who is looking for mortgage-backed securities that would perform best during a period of rising interest rates purchase: a. b. c. d. a 12
Why will the effective yield on a GNMA bond be higher than that of a U.S. Treasury bond with the same quoted yield to maturity? a. b. GNMA yields are figured on a 360-day basis. GNMAS carry higher
If a mortgage-backed bond is issued as a fully modified pass-through security, it means that: a. b. c. P d. bondholders will receive full and timely payment of principal and interest even if
Projecting prepayments for mortgage pass-through securities: a. requires only a projection of changes in the level of interest rates. b. c. d. requires analyzing both economic and demographic
A bond analyst at Omnipotent Bank (OB) notices that the prepayment experience on his holdings of high coupon GNMA issues has been moving sharply higher. What does this indicates? a. b. POP C. d.
Which of the following statements about mortgage pass-through securities is (are) correct? I. Pass-throughs offer better call protection than most corporates and Treasuries. II. Interest and
Which of the following are advantages of mortgage-backed securities (MBS)? a. b. C. d. I and II only II and III only I and III only I, II, and III
Which of the following are characteristics that would make mortgage-backed securities (MBSS) inappropriate for less sophisticated, conservative investors? I. The maturity of MBSs is quite variable
For a given mortgage pool, which of the following CMOs based on that pool is the riskiest investment? a. b. C. d. 100/300 PAC bond A-tranche sequential CMO interest-only (IO) strip principal-only
For a given mortgage pool, which of the following CMOS based on that pool is most likely to increase in price when market interest rates increase? a. b. C. d. 100/300 PAC bond A-tranche sequential
In the United States, what is the normal face value for corporate and U.S. government bond? How are coupons calculated? How often are coupons paid?
What is difference between a bond's promised yield and its realized yield? Which is more relevant? When we calculate a bond's yield to maturity, which of these are we calculating?
CIR Inc. has 7 percent coupon bonds on the market that have 11 years left to maturity. If the YTM on these bonds is 8.5 percent, what is the current bond price?
Trincor Company bonds have a coupon rate of 10.25 percent, 14 years to maturity, and a current price of $1,225. What is the YTM? The current yield?
Dunbar Corporation has bonds on the market with 10.5 years to maturity, a YTM of 10 percent, and a current price of $860. What must the coupon rate be on Dunbar's bonds?
Jane's Pizzeria issued 10-year bonds one year ago at a coupon rate of 8.75 percent. If the YTM on these bonds is 7.25 percent, what is the current bond price?
Jerry's Spaghetti Factory issued 12-year bonds two years ago at a coupon rate of 9.5 percent. If these bonds currently sell for 96 percent of par value, what is the YTM?
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