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Questions and Answers of Accounting

What is the difference between a closed-end investment company and a mutual fund?
Why can closed-end investment companies sell for a discount but mutual funds cannot sell for a discount?
Do closed-end investment companies charge load fees?
What are the possible sources of return to an investment in a closed-end fund?
How do exchange-traded funds (ETFs) differ from mutual funds?
Why are many ETFs considered alternatives to index funds?
Why does arbitrage virtually assure that an ETF will sell for its asset value?
How do ETFs facilitate the allocation of a portfolio and contribute to its diversification?
What is the importance of a portfolio’s allocation to the realized return?
A closed-end investment company is currently selling for $10 and its net asset value is $10.63. You decide to purchase 100 shares. During the year, the company distributes $0.75 in dividends. At end
A closed-end investment company is currently selling for $10 and you purchase 100 shares. During the year, the company distributes $0.75 in dividends. At end of the year, you sell the shares for
You buy 100 shares in a mutual fund at its net asset value of $10. The fund charges a load fee of 5.5 percent. During the year, the mutual fund distributes $0.75 in dividends. You redeem the shares
You buy 100 shares in a no-load mutual fund at its net asset value of $10. During the year, the mutual fund distributes $0.75 in dividends. You redeem the shares for their net asset value of $12.03,
You buy 100 shares in a no-load mutual fund at its net asset value of $10. During the year, the mutual fund distributes $0.75 in dividends. You redeem the shares for their net asset value of $12.03,
In an underwriting, what role does each of the following play?(a) The investment banker(b) The syndicate(c) The red herring(d) The SEC(e) The saver (investor).
1. What are the differences among the types of investment companies?How easily are they bought and sold? Do they sell for their net asset values? If not, how are their prices determined? Do they sell
What is an option? How is an option’s minimum (or intrinsic value) determined? How does arbitrage ensure that the price of an option will not be less than the option’s intrinsic value?
What is the source of leverage in a call option? Why may an option be considered a speculative investment?
If you saw that the price of a share of stock was $20, the exercise price of an option to buy the stock was $10, and the price of the option was $5, what would you do?
What is the CBOE, and why are secondary markets crucial to the popularity of options?
What is the difference between covered and naked call writing? Why do some individuals buy call options while others write calls?
If an individual buys a call option and the price of the underlying stock declines, what should happen to the option? What is the maximum amount the investor can lose?
In what ways are calls similar to warrants? How do they differ?
Why does the intrinsic value of a call rise with the price of the stock, whereas the intrinsic value of a put declines as the stock’s price rises?
What should happen to an option’s time premium as the option approaches expiration? What happens to an out-of-the-money option at expiration?
If an individual sells a call option, how may that investor close the position?
What advantage does purchasing a stock index option offer over buying options on individual securities?
Why does a protective put reduce the potential loss from a long position in a stock?
Why do rights offerings maintain stockholders’ relative position in a corporation?
A particular call is the option to buy stock at $25. It expires in six months and currently sells for $4 when the price of the stock is $26.a) What is the intrinsic value of the call? What is the
What are the intrinsic values and time premiums paid for the following options?If the stock sells for $31 at the expiration date of the preceding options, what are the profits or losses for the
The price of a stock is $51. You can buy a six-month call at $50 for $5 or a six-month put at $50 for $2.a) What is the intrinsic value of the call?b) What is the intrinsic value of the put?c) What
Given the following information,Price of a stock .......$101Strike price of a six-month call .......$100Market price of the call .......$5Strike price of a six-month put .......$100Market price of
A particular put is the option to sell stock at $40. It expires after three months and currently sells for $2 when the price of the stock is $42.a) If an investor buys this put, what will the profit
A LEAP with an expiration date of two years is an option to buy stock at $24. The current market price of the stock is $35, and the market price of the LEAP is $15.a) What is the option’s intrinsic
A stock that is currently selling for $47 has the following six-month options outstanding:a) Which option(s) is (are) in the money?b) What is the time premium paid for each option?c) What is the
An investor buys a stock for $36. At the same time a six-month put option to sell the stock for $35 is selling for $2.a) What is the profit or loss from purchasing the stock if the price of the stock
Options may also be used with other securities to devise various investment strategies. For example, an investor has the following alternative investments and their prices:Common stock .............$
If you anticipate that the price of a stock will rise, you could (1) buy the stock, (2) buy a call, (3) sell a covered call, or (4) sell a put. All four positions may generate profits if the price of
A company has 10,000,000 shares outstanding and needs to raise $100,000,000 in equity funds. Stockholders have preemptive rights, so the firm must initially offer new stock to current stockholders.
1. What is the current yield offered by the stock, the bond, and the calls and puts?2. What is the value of the bond in terms of the stock?3. What is the intrinsic value of each option?4. What are
What, according to the Black-Scholes option valuation model, is the relationship between the value of a call option and each of the following?a) Risk as measured by the variability of the underlying
According to Black-Scholes option valuation and put–call parity, what will happen to the value of a put option if interest rates decline?
How may the Black-Scholes option valuation model be used to determine the risk associated with the underlying stock?
An investor sells a stock short in July and its price declines in November—the position has generated a profit. However, the individual does not want to close the position and realize the profit
An investor expects the price of a stock to remain stable and writes a straddle. What is this individual’s risk exposure? How may the investor close the position?
You expect the price of a stock to decline but do not want to sell the stock short and run the risk that the price of the stock may rise dramatically. How could you use a bear spread strategy to take
You sell a stock short. How can you use an option to reduce your risk of loss should the price of the stock rise?
How do collars, the hedge ratio, the protective call, and the protective put help investors manage risk?
If you thought a stock was fairly valued and its price would not change, how could you use a straddle to take advantage of your valuation? If you follow this strategy and the stock’s price does not
The Black-Scholes valuation model shows that higher interest rates result in higher call option valuations. Do these higher interest rates and call valuations imply that put values will also rise?
A stock sells for $30. What is the value of a one-year call option to buy the stock at $25, if debt currently yields 10 percent? (Assume F(d1) and F(d2) = 1.)
A call option is the right to buy stock at $50 a share. Currently the option has six months to expiration, the volatility of the stock (standard deviation) is 0.30, and the rate of interest is 10
In the body of this chapter, disequilibrium of the following equation indicated an opportunity for a riskless arbitrage:The equation was illustrated as follows. A stock sells for $105; the strike
Put–call parity in effect states that long positions in a call and a risk-free bond plus a short position in a put must be the same value as the underlying stock. If not, at least one market is in
Put–call parity asserts that if the markets are in equilibrium, a long position in a stock and a put produces the same return (or profit/loss) as a long position in a discounted bond and call with
Put–call parity basically says that combination of a stock and a put produces the same return as the comparable position in a call and a risk-free bond. If not, at least one market is in
One useful piece of information derived from the Black-Scholes model for the valuation of a call option is the hedge ratio, which gives the slope of the line relating the change in the price of an
Given the following:Price of the stock ........... $26Price of a six-month call at $25 ......... 2Price of a six-month call at $30 ......... 4An investor buys the $25 call and sells the $30
Currently a stock that sells for $57 has a put option at $55 and another at $60. The prices of the options are $6 and $3, respectively. What would you do? Illustrate and explain your actions.
Many warrants were initially issued attached to bonds. They were subsequently detached and traded separately from the bonds. In some cases, the bond could be used in lieu of cash to exercise the
A put and a call have the following terms:The price of the stock is currently $29. You sell the stock short. Illustrate how to use the call or the put to reduce your risk exposure.a) What is the
Given the following:Price of the stock ......... $18Price of a three-month call at $20 ......... 2Price of a three-month call at $15 .........5a) What is the profit (loss) at the expiration date of
A straddle occurs when an investor purchases both a call option and a put option. Such a strategy makes sense when the individual expects a major price movement but is uncertain as to the direction.
As an executive, you received stock options that you recently exercised. However, you cannot legally sell the stock for the next six months. Currently the stock is selling for $38.25. A call to buy
An insider purchased a stock prior to the IPO for $10 a share. Once public, the stock runs up to $55 a share but the insider cannot sell the stock for a year. Since put and call options exist, the
1. Which strategy works best if a bidding war erupts?2. Which strategy works best if the hostile takeover is defeated?3. Which strategy works best if the original offer price becomes the final
What is a futures contract? What are the spot price and the futures price of a commodity? When must the two prices be equal?
Why is investing in commodity futures considered to be speculative?
What is the difference between a long and a short position in a commodity future?
What is margin and why is it a source of leverage? What is a margin call? How does margin for futures differ from margin for stocks?
Why do farmers and other users of commodity futures hedge their positions?
If an investor anticipates a decline in a commodity’s price, which futures position should he or she take?
How may government intervention affect commodity prices? Are commodity futures markets subject to government regulation?
What is a financial futures contract? If you expect interest rates to rise, should you buy or sell a financial futures contract?
If you anticipated that the price of the British pound would rise and wanted to speculate on that increase, should you sell or buy a contract for the delivery of pounds?
What is the difference between the long and the short positions in a contract for the future delivery of the S&P 500 stock index? If you expect stock prices to fall, do you buy or sell stock index
How do changes in the futures market for stock indexes affect the stock market? Why may stock index futures and programmed trading result in dramatic price changes in individual stocks?
How does the swapping of payments reduce a firm’s risk exposure? When would an individual find it desirable to enter a swap agreement?
The futures price of corn is $2.00. The contracts are for 10,000 bushels, so a contract is worth $20,000. The margin requirement is $2,000 a contract, and the maintenance margin requirement is
The futures price of gold is $650. Futures contracts are for 100 ounces of gold, and the margin requirement is $5,000 a contract. The maintenance margin requirement is $1,500. You expect the price of
You expect the stock market to decline, but instead of selling stocks short, you decide to sell a stock index futures contract based on an index of New York Stock Exchange common stocks. The index is
This problem illustrates hedging with currency futures. The questions lead you through the process of hedging. While this material was not explicitly covered in the text material, your instructor may
One use for futures markets is “price discovery,” that is, the futures price mirrors the current consensus of the future price of the commodity. The current price of gold is $350 but you expect
The current price of wheat is $3.70 and the expenses for carrying wheat (combined cost of storage, insurance, shipping) are 20 percent of the price. Based on this information, what should be the
Two institutional investors execute a swap agreement for $10,000,000 in which one party agrees to remit to the counterparty the return on the EAFE, an index of European, Australasian, and Far-Eastern
1. What is the value of the contract in terms of the index?2. How many contracts would DeLuca have to sell to hedge $1,000,000? Why should DeLuca sell rather than purchase the contracts?3. How much
What are foreign exchange and the foreign exchange market? What causes the prices of currencies to fluctuate?
What are the sources of risk associated with foreign investments? How can the individual investor manage those risks?
Would a U.S. investor who owned foreign securities prefer a devaluation or revaluation of the U.S. dollar?
What does a deficit in a country’s balance of trade imply? Can a country have a surplus in its balance of payments?
If a British investor who purchased French securities anticipates that the value of the euro may fall but does not wish to sell the securities, what should this investor do?
Why may the addition of foreign securities to a U.S. investor’s portfolio reduce this individual’s risk exposure?
Why may investing in mutual funds with foreign investments be preferable to purchasing foreign stocks?
Why may investing in iShares be preferable to investing in mutual funds that specialize in foreign investments?
Why may the development of the European Monetary Union reduce the potential for diversification but increase the potential for economic growth?
What is a nation’s cash inflow (outflow) on its current account and its capital account, given the following information? Was there a net currency inflow or outflow?Imports
What is a nation’s cash inflow (outflow) on its current account and its capital account, given the following information? Was there a net currency inflow or outflow?Imports
What is the cost of $1.00 in each of the following currencies?British pound .......$1.7770Canadian dollar .......0.7190Russian ruble .......0.3454Japanese yen .......0.08798
Last year Stella Shoes Inc. had investments in Paris worth 500,000 euros. At that time, the euro was worth $1.20. Today the euro is trading for $1.30. What is the gain or loss on the investment in

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