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Questions and Answers of Accounting

What is event risk? In addition to protective covenants, which bond feature do you think best reduces or eliminates such risk?
From the bondholder's perspective, what are the potential advantages and disadvantages of floating coupons?
Why is effective duration a more accurate measure of interest rate risk for bonds with embedded options?
What are some examples of embedded options in bonds? How do they affect the price of a bond?
Explain the difference between an original issue junk bond and a fallen angel bond.
What are the five factors that determine an option's price?
What is the impact of lengthening the time to expiration on an option's value? Explain.
What happens to the stock price when the stock pays a dividend? What impact does a dividend have on the prices of call and put options?
How do interest rates affect option prices? Explain.
What is the time value of a call option? Of a put option? What happens to the time value of a call option as the maturity increases? What about a put option?
What does an option's delta tell us? Suppose a call option with a delta of .60 sells for $5.00. If the stock price rises by $1, what will happen to the call's value?
What is vesting in regard to employee stock options? Why would a company use a vesting schedule with employee stock options?
You own stock in a company that has just initiated employee stock options. How do the employee stock options benefit you as a shareholder?
In general, employee stock options cannot be sold to another party. How do you think this affects the value of an employee stock option compared to a market-traded option?
What is the value of a call option if the underlying stock price is $108, the strike price is $105, the underlying stock volatility is 47 percent, and the risk-free rate is 4 percent? Assume the
What is the value of a call option if the underlying stock price is $86, the strike price is $90, the underlying stock volatility is 50 percent, and the risk-free rate is 4 percent? Assume the
What is the value of a call option if the underlying stock price is $81, the strike price is $75, the underlying stock volatility is 37 percent, and the risk-free rate is 5 percent? Assume the
A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 2 percent, and the risk-free rate is 6 percent.What is the value of a call
The stock of Nugents Nougats currently sells for $44 and has an annual standard deviation of 45 percent. The stock has a dividend yield of 1.5 percent, and the risk-free rate is 5.3 percent. What is
The stock of Lead Zeppelin, a metal manufacturer, currently sells for $86 and has an annual standard deviation of 41 percent. The risk-free rate is 6 percent. What is the value of a put option with a
What is the value of a put option if the underlying stock price is $83, the strike price is $80, the underlying stock volatility is 47 percent, and the risk-free rate is 5 percent? Assume the option
A stock with an annual standard deviation of 60 percent currently sells for $67. The risk-free rate is 6 percent. What is the value of a put option with a strike price of $80 and 150 days to
You are managing a pension fund with a value of $200 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many
Suppose you have a stock market portfolio with a beta of .95 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and
A stock is currently selling for $52. In one period, the stock will move up by 1.15 or down by .87. A call option with a strike price of $50 is available. If the risk-free rate of interest is 2.5
A stock is currently priced at $74 and will move up by a factor or 1.12 or down by a factor of .94 over the next period. The risk-free rate of interest is 3.50 percent. What is the value of a call
A stock with a current price $58 has a put option available with a strike price of $60. The stock will move up 1.13 or down .88 over the next period and the risk-free rate is 3 percent. What is the
A call option has an exercise price of $65 and matures in six months. The current stock price is $73, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the
A stock is currently priced at $55. A call option with an expiration of one year has an exercise price of $60. The risk-free rate is 12 percent per year, compounded continuously, and the standard
In its 10-Q dated November 2, 2007, Dell, Inc., had outstanding employee stock options representing over 272 million shares of its stock. Dell accountants estimated the value of these options using
Suppose you hold Dell employee stock options representing options to buy 10,000 shares of Dell stock. You wish to hedge your position by buying put options with three-month expirations and a $35
Immediately after establishing your put options hedge, volatility for Dell stock suddenly jumps to 45 percent. This changes the number of put options required to hedge your Dell employee stock
A stock is currently selling for $59. Over the next two periods, the stock will move up by a factor of 1.15 or down by a factor of .87 each period. A call option with a strike price of $60 is
A stock is currently priced at $64 and will move up by a factor or 1.18 or down by a factor of .85 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is
A stock with a current price $82 has a call option available with a strike price of $80. The stock will move up by a factor of 1.14 or down by a factor of .88 each period for the next two periods
What is the difference between put bonds and extendible bonds?
All else the same, callable bonds have less interest rate sensitivity than noncallable bonds. Why? Is this a good thing?
Two callable bonds are essentially identical, except that one has a refunding provision while the other has no refunding provision. Which bond is more likely to be called by the issuer? Why?
A convertible bond has a 4 percent coupon, paid semiannually, and will mature in 10 years. If the bond were not convertible, it would be priced to yield 7 percent. The conversion ratio on the bond is
There is a 30-year bond with a 9 percent coupon and a 6 percent yield to maturity. The bond is callable in 10 years at par value. What is the Macaulay duration of the bond assuming it is not called?
Compute the bond€™s conversion value and market conversionprice.
Determine whether the value of a callable convertible bond will increase, decrease, or remain unchanged if there is an increase in stock price volatility. What if there is an increase in interest
Calculate the following:a. The current market conversion price for the Ytel convertible bond.b. The expected one-year rate of return for the Ytel convertible bond.c. The expected one-year rate of
One year has passed and Ytel€™s common equity price has increased to $51 per share. Also, over the year, the interest rate on Ytel€™s nonconvertible bonds of the same maturity has
What are the key differences between T-bills and T-bonds?
What are the key differences between T-notes and T-bonds?
What are typical spreads for T-notes and T-bonds? Why do you think they differ from issue to issue?
From an investor's standpoint, what are the key differences between Treasury and agency issues?
From an investor's standpoint, what are the main differences between Treasury and municipal issues?
What are serial bonds? What purpose does this structure serve?
What is the difference between a revenue bond and a general obligation bond?
Treasury and municipal yields are often compared to calculate critical tax rates. What concerns might you have about such a comparison? What do you think is true about the calculated tax rate?
For a callable Treasury 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?
Why might the yield to maturity on, say, a BBB-rated municipal bond with moderate default risk actually be less than that of a U.S. Treasury bond with no default risk?
In a recent issue of The Wall Street Journal, compare the yields on U.S. Treasury bonds with the yields on municipal bonds. Why might these yield spreads depend on the state of the economy?
A STRIPS with 13 years until maturity and a face value of $10,000 is trading for $4,131. What is the yield to maturity?
The Federal Reserve announces an offering of Treasury bills with a face value of $50 billion. Noncompetitive bids are made for $9 billion, along with the following competitive bids:In a single-price
A municipal bond with a coupon rate of 4.9 percent sells for $4,750 and has seven years until maturity. What is the yield to maturity of the bond?
A municipal bond has 24 years until maturity and sells for $5,820. If the coupon rate on the bond is 5.70 percent, what is the yield to maturity?
Assume the bond in the previous problem can be called in 10 years. What is the yield to call if the call price is 110 percent of par?
A Treasury bond maturing in November 2014 and callable in November 2009 has a quoted price of 107:06 and a coupon rate of 11.75 percent. Assuming the bond matures in exactly 6 years, what is the
In a recent Wall Street Journal, examine the yields on Treasury bonds maturing in 2014 and 2015. Why do you think the yields for the issues maturing in 2014 are so different?
A STRIPS traded on May 1, 2008, matures in 13 years on May 1, 2021. Assuming a 5.9 percent yield to maturity, what is the STRIPS price?
A STRIPS traded on July 1, 2008, matures in 19 years on July 1, 2027. The quoted STRIPS price is 38.50. What is its yield to maturity?
How does mortgage securitization benefit borrowers?
How does mortgage securitization benefit mortgage originators?
All else the same, will the payments be higher on a 15-year mortgage or a 30-year mortgage? Why?
From an investor's point of view, what is the difference between mortgage pools backed by GNMA, FNMA, and FHLMC?
What are some of the reasons that mortgages are paid off early? Under what circumstances are mortgage prepayments likely to rise sharply? Explain.
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 the statement
Mortgage pools also suffer from defaults. Explain how defaults are handled in a fully modified mortgage pool. In the case of a fully modified mortgage pool, explain why defaults appear as prepayments
What is a collateralized mortgage obligation? Why do they exist? What are three popular types?
What are IO and PO strips? Assuming interest rates never change, which is riskier?
Which has greater interest rate risk, an IO or a PO strip?
Consider a single whole bond sequential CMO. It has two tranches, an A-tranche and a Z-tranche. Explain how the payments are allocated to the two tranches. Which tranche is riskier?
Explain in general terms how a protected amortization class CMO works.
Why is Macaulay duration an inadequate measure of interest rate risk for an MBS? Why is effective duration a better measure of interest rate risk for an MBS?
What is the monthly payment on a 30-year fixed-rate mortgage if the original balance is $220,000 and the rate is 6.3 percent?
If a mortgage has monthly payments of $945, a life of 30 years, and a rate of 6.9 percent per year, what is the mortgage amount?
A homeowner takes out a $260,000, 30-year fixed-rate mortgage at a rate of 6.5 percent. What are the monthly mortgage payments?
You have decided to buy a house. You can get a mortgage rate of 6.4 percent, and you want your payments to be $1,325 or less. How much can you borrow on a 30-year fixed-rate mortgage?
What is the single monthly mortality assuming the conditional prepayment rate is 5 percent?
What is the conditional prepayment rate if the single monthly mortality is .493 percent?
A $100,000 GNMA pass-through bond issue has a value of $113,830. The value of the interest-only payments is $46,921. What is the value of the principal-only payment?
A 30-year, $235,000 mortgage has a rate of 7.1 percent. What are the interest and principal portions in the first payment? In the second?
A homeowner takes a 25-year fi xed-rate mortgage for $190,000 at 7.6 percent. After seven years, the homeowner sells the house and pays off the remaining principal. How much is the principal payment?
Consider a 30-year, $280,000 mortgage with an 8.3 percent interest rate. After six years, the borrower (the mortgage issuer) pays it off. How much will the lender receive?
Consider a 30-year, $210,000 mortgage with a rate of 8 percent. Nine years into the mortgage, rates have fallen to 6 percent. What would be the monthly saving to a homeowner from refinancing the
Consider a 25-year, $180,000 mortgage with a rate of 7.25 percent. Eight years into the mortgage, rates have fallen to 6.6 percent. What would be the monthly saving to a homeowner from refinancing
Consider a 30-year, $230,000 mortgage with a rate of 6.72 percent. Five years into the mortgage, rates have fallen to 6.18 percent. Suppose the transaction cost of obtaining a new mortgage is $2,500.
A homeowner took out a 30-year, fixed-rate mortgage of $185,000. The mortgage was taken out six years ago at a rate of 7.43 percent. If the homeowner refinances, the charges will be $3,500. What is
A homeowner took out a 30-year fixed-rate mortgage of $170,000. The mortgage was taken out 20 years ago at a rate of 7.95 percent. If the homeowner refinances, the charges will be $3,000. What is the
What are the conditional prepayment rates for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages if the 100 PSA benchmark is 5 percent per year? How do you interpret these numbers?
In the previous question, what is the single monthly mortality for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages? How do you interpret these numbers?
A 30-year mortgage has an annual interest rate of 7.18 percent and a loan amount of $180,000. What are the monthly mortgage payments?
A 30-year mortgage has an annual interest rate of 6.84 percent and a loan amount of $250,000. What are the interest and principal for the 120th payment?
A 30-year mortgage has an annual interest rate of 7.42 percent and a loan amount of $200,000. What is the remaining balance at the 180th payment?
The following items are from the assets section of WestJet Airlines Ltd.€™s December 31, 2010, balance sheet (in thousands):(a) Identify the balance sheet (statement of financial
The Funtimes Miniature Golf and Driving Range, Inc. opened on May 1. These selected events and transactions occurred during May:May 1 Issued common shares for $126,770 cash.4 Purchased Henry’s Golf
The Star Theatre, Inc. is unique as it shows only triple features of sequential theme movies. As at February 29, 2012, the Star’s general ledger showed Cash $15,660; Land $85,830; Buildings

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