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Finance
Q:
Speculators who anticipate a decline in interest rates may consider ________ option on Treasury bond futures.
a. purchasing a put option
b. selling a call option
c. purchasing a call option
d. None of these are correct.
Q:
A company's quarterly income statements show that in the last three quarters both Sales Revenue and net income have been falling. Given this information, which of the following conclusions drawn by users are valid?
A) Creditors are likely to conclude that the risk of lending to the company is declining and might be willing to accept a lower interest rate on loans.
B) Investors are likely to conclude that the stock price is likely to rise, making the company more attractive as a potential investment.
C) Customers are likely to conclude that the company is struggling; therefore it is permissible to take longer to pay amounts they owe to the company.
D) Owners may conclude that the company will be less likely to distribute dividends.
Q:
European-style stock options
a. are long-term options (at least one year until expiration at the time they are created).
b. can be exercised after the expiration date.
c. can be exercised any time until the expiration date.
d. None of these are correct.
Q:
A creditor might look at a company's financial statements to determine if the:
A) company is likely to have the resources to repay its debts.
B) company's stock price is likely to fall, signaling a good time to sell.
C) company's stock price is likely to rise, signaling a good time to buy.
D) company pays a dividend.
Q:
Use the information above to answer the following question. As of September 30, Year 3, who provided more financing for Anonymous, Inc.?
A) Owners
B) Creditors
C) Both provided equal financing
D) Neither provided any financing
Q:
____ can execute transactions desired by investors and trade stock options for their own account.
a. Maintenance brokers
b. Discount brokers
c. Market makers
d. None of these are correct.
Q:
Use the information above to answer the following question. Which one of the following statements regarding the balance sheet for Anonymous Inc. is correct?
A) Retained Earnings is misclassified; it should be reported in the Assets section of the balance sheet.
B) The $207,100 shown as Retained Earnings on the balance sheet represents the cumulative amount of dividends distributed.
C) Anonymous, Inc. is owed $310,500 from customers who have purchased goods or services from the company, but have not yet paid for them.
D) The amount of retained earnings reported on this balance sheet represents the retained earnings at the beginning of the year.
Q:
The ____ is not a factor affecting the call option premium.
a. market price of the underlying instrument (relative to the option's exercise price)
b. volatility of the underlying instrument
c. current price of futures contracts on the underlying instrument
d. time to maturity of the call option
Q:
Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.
a. increases; increases
b. increases; decreases
c. limits; increases
d. limits; decreases
Q:
Use the information above to answer the following question. What is the missing amount for Notes Payable?
A) $207,100.
B) $437,800.
C) $1,439,200.
D) $3,347,700.
Q:
Use the information above to answer the following question. What is the missing amount for Total Liabilities?
A) $3,347,700.
B) $1,439,200.
C) $1,470,700.
D) $1,877,000.
Q:
A put option is "out of the money" when the
a. market price of the security exceeds the exercise price.
b. market price of the security equals the exercise price.
c. market price of the security is less than the exercise price.
d. premium on the option is less than the exercise price.
Q:
Use the information above to answer the following question. What is the amount of cash flows from (used in) financing activities?
A) ($40,000)
B) $5,000
C) $49,000
D) $10,000
Q:
The premium on an existing put option should ____ when the price of the underlying stock increases.
a. be negative
b. decline
c. increase
d. be unaffected
e. be negative AND decline
Q:
Use the information above to answer the following question. What was the amount of cash flows from (used in) investing activities?
A) ($1,000)
B) ($40,000)
C) ($10,000)
D) $10,000
Q:
When the market price of the underlying security exceeds the exercise price, a
a. call option is in the money.
b. put option is in the money.
c. call option is at the money.
d. call option is out of the money.
Q:
Use the information above to answer the following question. What was the amount of cash flows from (used in) operating activities?
A) $5,000.
B) $35,000.
C) $25,000.
D) $4,000.
Q:
Which of the following is NOT an assumption underlying the Black-Scholes option-pricing model?
a. The risk-free rate is known and constant over the life of the option.
b. The probability distribution of stock prices is lognormal.
c. Investors are risk averse and will always choose the option that involves the least risk.
d. The variability of a stock's return is constant.
e. There are no transaction costs involved in trading options.
Q:
Use the information above to answer the following question. What was the amount of net income for the year?
A) $225,000.
B) $275,000.
C) $175,000.
D) $450,000.
Q:
Corporations involved in international business transactions may purchase ________ to hedge __________ denominated in a foreign currency.
a. currency put options; future receivables
b. currency call options; future payables
c. currency call options; future receivables
d. currency put options; future receivables AND currency call options; future payables
Q:
Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____, and his return on his investment is about _______ percent.
a. 5,300; 366
b. 11,000; 27
c. -5,000; −167
d. 5,000; 167
e. None of these are correct.
Q:
Use the information above to answer the following question. What was the amount of the change in total stockholders equity during the year?
A) $350,000 increase
B) $450,000 increase
C) $250,000 increase
D) $200,000 increase
Q:
Use the information above to answer the following question. Based on this information, what was the amount of retained earnings at the beginning of the year?
A) $150,000.
B) $850,000.
C) $550,000.
D) $350,000.
Q:
Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____.
a. -406.25
b. 4,718.75
c. -4,718.75
d. -812.50
e. None of these are correct.
Q:
Use the information above to answer the following question. What is the amount of retained earnings on the Balance Sheet at the end of Year 4?
A) $7,725.
B) $6,725.
C) $4,800.
D) $4,725.
Q:
The purchaser of an American-style put option is always better off exercising the option at the expiration date than before that date.a. Trueb. False
Q:
Use the information above to answer the following question. What is the amount of total liabilities at the end of Year 4?
A) $7,075.
B) $10,075.
C) $9,075.
D) $12,975.
Q:
American-style stock options can be exercised only just before expiration.
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of total assets at the end of Year 4?
A) $16,800.
B) $16,500.
C) $21,600.
D) $23,500.
Q:
Use the information above to answer the following question. What is the amount of net income for Year 4?
A) $3,825.
B) $1,825.
C) $10,300.
D) $5,625.
Q:
Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes.
a. True
b. False
Q:
Several call options are available for a given stock, and the risk-return potential will vary among them
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of retained earnings at the end of Year 2?
A) $37,000.
B) $240,000.
C) $29,000.
D) $269,000.
Q:
Use the information above to answer the following question. What was the amount of retained earnings at the end of Year 1?
A) $20,000.
B) $8,000.
C) $150,000.
D) $155,000.
Q:
Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock's value.
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of the change in stockholders equity during the year?
A) $3,000 increase
B) $21,000 increase
C) $21,000 decrease
D) $3,000 decrease
Q:
A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level.
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of stockholders equity at the beginning of the year?
A) $0
B) $25,000.
C) $175,000.
D) $100,000.
Q:
An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility.
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of total stockholders equity that would be reported on the Balance Sheet at the end of the year?
A) $30,000.
B) $57,000.
C) $87,000.
D) $102,000.
Q:
Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk.
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of total assets to be reported on the balance sheet at the end of the year?
A) $112,000.
B) $102,000.
C) $119,000.
D) $155,000.
Q:
An option with a higher exercise price has a higher call option premium and a lower put option premium.
a. True
b. False
Q:
Use the information above to answer the following question. What is the amount of net income on the income statement for the year?
A) $30,000.
B) $38,000.
C) $88,000.
D) $47,000.
Q:
Speculators sell call options on currencies that they expect to strengthen against the dollar.
a. True
b. False
Q:
Use the information above to answer the following question. The amount of assets at the end of the year is
A) $105,000.
B) 108,000.
C) $104,000.
D) $107,000.
Q:
The longer a call option's time to maturity, the lower the call option premium, other things being equal.
a. True
b. False
Q:
The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States.
a. True
b. False
Q:
Use the information above to answer the following question. The amount of liabilities at the end of the year is
A) $30,000.
B) $33,000.
C) $28,000.
D) $32,000.
Q:
Use the information above to answer the following question. The amount of retained earnings at the end of the year is
A) $15,000.
B) $11,000.
C) $12,000.
D) $1,000.
Q:
The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option.
a. True
b. False
Q:
Use the information above to answer the following question. What was the amount of net income for the year?
A) $2,000.
B) $1,000.
C) $3,000.
D) $5,000.
Q:
When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked."
a. True
b. False
Q:
Use the information above to answer the following question. What amount is represented by letter L in the statement of cash flows?
A) $159,000
B) $85,000
C) ($85,000)
D) ($159,000)
Q:
The results with covered call writing are better than the results without covered call writing both when the stock performs poorly and when it performs well.
a. True
b. False
Q:
Use the information above to answer the following question. What amount is represented by letter J in the statement of cash flows?
A) ($42,000)
B) $42,000
C) ($22,000)
D) $22,000
Q:
A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.
a. True
b. False
Q:
Use the information above to answer the following question. What amount is represented by letter C in the statement of cash flows?
A) $14,000
B) $10,000
C) ($14,000)
D) $0
Q:
Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile.
a. True
b. False
Q:
The amount of beginning retained earnings is equal to the:
A) beginning retained earnings of the prior year.
B) ending retained earnings of the prior year.
C) beginning retained earnings of the next year.
D) ending retained earnings of the next year.
Q:
The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal.
a. True
b. False
Q:
Which transaction would be reported on the income statement for the current year?
A) The revenue earned from selling sold goods in the current year to customers who have not yet paid for those goods (that is, they have promised to pay for those goods next year).
B) The amount of cash received from customers this year as payment for goods that were sold to those customers last year.
C) The proceeds from a borrowing from the bank that was to be used to finance business activities during the current year.
D) The proceeds from the issuance of common stock to owners that was to be used to finance business activities during the current year.
Q:
Market makers can execute stock option transactions for customers but do not trade stock options for their own account.
a. True
b. False
Q:
The income statement would report the amount of:
A) cash at the end of the year.
B) supplies used up during the current year.
C) dividends distributed to owners during the current year.
D) unpaid employee wages at the end of the year.
Q:
Indicate whether the statement is true or false.Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.a. Trueb. False
Q:
Which of the following statements about financial statement information is correct?
A) If a company has total revenues of $80,000, total expenses of $50,000 and dividends of $10,000, they will have net income of $20,000.
B) A company with total stockholders equity of $45,000 and total assets of $75,000 must have total liabilities of $120,000.
C) A company with liabilities of $80,000 and stockholders equity of $50,000 will have Assets of $30,000.
D) A company with total stockholders equity of $120,000 and common stock of $75,000 must have total retained earnings of $45,000.
Q:
Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates will decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____.
a. sell; loss
b. purchase; gain
c. purchase; loss
d. sell; gain
e. None of these are correct.
Q:
Which of the following statements about financial statements is not correct?
A) Cash flows from financing activities would appear on the Statement of Cash Flows.
B) Dividends would appear on the Statement of Retained Earnings.
C) Assets would appear on the Income Statement.
D) Revenues would appear on the Income Statement.
Q:
Liabilities reported on the balance sheet include:
A) Accounts Payable, Notes Payable, and Common Stock.
B) Accounts Receivable, Supplies Expense, and Retained Earnings.
C) Accounts Payable, Notes Payable, and Salaries and Wages Payable.
D) Common Stock, Retained Earnings, and Notes Payable.
Q:
The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be
a. equal to the prevailing stock prices.
b. below the prevailing stock prices.
c. above the prevailing stock prices.
d. negative.
Q:
Which of the following is NOT true regarding the futures exchanges?
a. They provide an organized marketplace where standardized futures contracts can be traded.
b. They facilitate the trading of specialized futures contracts that are tailored to the preferences of the parties involved.
c. They facilitate the trading process by clearing, settling, and guaranteeing all transactions.
d. They are regulated by the Commodity Futures Trading Commission (CFTC).
e. All of these are correct.
Q:
Assets reported on the balance sheet include:
A) Accounts Receivable, Sales Revenue, and Cash.
B) Equipment, Supplies Expense, and Cash.
C) Accounts Payable, Retained Earnings, and Cash.
D) Accounts Receivable, Equipment, and Cash.
Q:
An S&P 500 index futures contract is valued at $250 times its index level. Laura sells an S&P 500 futures contract with a September settlement date when the index is 2550. By the settlement date, the S&P 500 index falls to 2450. The profit (or loss) on Laura's position in the S&P 500 futures contract is
a. $15,000.
b. -$15,000.
c. $25,000.
d. −$25,000.
e. 0
Q:
The separate entity assumption requires that:
A) financial information depicts the economic substance of the business activities.
B) financial reports of a business are assumed to include the results of only that businesss activities.
C) the results of business activities are reported in an appropriate monetary unit.
D) financial information can be compared across businesses because similar accounting methods have been applied.
Q:
Investing activities on the statement of cash flows arise from transactions:
A) with lenders, borrowing and repaying cash.
B) with stockholders, selling company stock and paying dividends.
C) directly related to running the business to earn profit.
D) related to buying or selling productive resources with long lives.
Q:
The prices of stock index futures
a. are always the same as the prices of the stocks representing the index.
b. are always a little above the prices of the stocks representing the index.
c. are always a little below the prices of the stocks representing the index.
d. None of these are correct.
Q:
A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date.
a. option contract
b. brokerage contract
c. financial futures contract
d. margin call
Q:
In this period, a company recorded Sales Revenue of $50,000 from sales of goods to customers who agreed to pay later. In the next period, the company received payment from customers of $45,000. Which of the following statements is correct?.
A) Revenue for this period is $45,000.
B) Accounts Receivable at the end of this period is $50,000.
C) Accounts Payable at the end of this period is $5,000 (or $50,000 $45,000).
D) Expenses for next period will increase by $5,000 (or $50,000 $45,000).
Q:
The net gain or loss on a futures contract for a stock index that is not closed out is the difference between the futures price when the initial position was created and the futures price at
a. the settlement date.
b. the date at which the futures price reaches its maximum.
c. the date at which the futures price reaches its minimum.
d. the date three months beyond the date when the initial position was taken.
Q:
The statement of cash flows for a company contained the following:
Cash flows from operating activities in the amount of $29,000
Cash flows from investing activities in the amount of$30,000
Cash flows from (used by) financing activities in the amount of ($45,000)
What was the change in cash for the period?
A) $14,000 increase
B) $15,000 increase
C) $14,000 decrease
D) $15,000 decrease