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Investments & Securities
Q:
To provide insurance against declining prices on previously purchased stock, an investor could
a. buy a call.
b. write a put.
c. buy a stock index option.
d. buy a put.
Q:
Which of the following statements about portfolio insurance is FALSE?
a. There are several methods of insuring a portfolio.
b. It seeks to provide a minimum return while offering the opportunity to
participate in rising prices.
c. Futures are typically not used to hedge stock portfolios.
d. Puts and calls typically are not used to insure portfolios.
Q:
The writer of a naked call faces
a. an unlimited potential loss.
b. a specified potential loss.
c. no chance of loss because this is a conservative strategy.
d. an unlimited potential gain.
Q:
A call option written against stock owned by the writer is said to be
a. naked.
b. in the money.
c. out of the money.
d. covered.
Q:
A writer of a call can terminate the contract before expiration by:
a. writing a second call.
b. buying a put.
c. buying a comparable call.
d. writing a put.
Q:
Other things equal, after an option first becomes available in the market,
a. its time value approaches zero.
b. its time value increases into maturity.
c. the volatility of the stock is negatively related to the value of the call.
d. if it is out of the money, it will have no time value.
Q:
Options sold on exchanges are protected against
a. stock dividends and splits.
b. cash dividends.
c. interest rate movements.
d. inflation.
Q:
To hedge a short sale, an investor could
a. buy a call.
b. write a call.
c. buy a put.
d. write a put.
Q:
Which of the following is not a reason for investors to participate in options?Options eliminate leverage.Options are a smaller investment than stock investments.Options allow investors to trade on the overall market movements.Options can reduce risk.
Q:
One important reason for the existence of derivatives is that they:
a. help lower transactions costs.
b. have valuable tax benefits.
c. contribute to market completeness.
d. are risk-free.
Q:
Put and call options on gold are considered:Commodity derivativesFinancial derivativesForward contractsFutures contracts
Q:
To maximize his/her potential upside returns, ceteris paribus, an investor who was bullish on a particular stock would execute which of the following options strategies:buy callswrite callsbuy putswrite puts
Q:
The standard option contract is for:10 shares of stock50 shares of stock100 shares of stock1 share of stock
Q:
To maximize his/her expected returns, ceteris paribus, an investor who was bearish on a particular stock would execute which of the following options strategies:buy callswrite callsbuy putswrite puts
Q:
A major difference between new shares sold by a corporation and shares sold under a call option is that:there is no profit or loss under the shares sold under the call.there is no risk to the investor with the call.there is no increase in the shares outstanding with the call.there is no commission to the investor with the call.
Q:
LEAPS are typically:more expensive than short-term options.cheaper than short-term options.only available for major indexes, not individual stocks.long-term options, with maturities often between 5 and 10 years.
Q:
The exercise price on an option is also known as the:premium.strike price.theoretical value.spot price.
Q:
Which of the following statements is true regarding American and European options?American options can be exercised only at expiration.American options can be exercised only in the last week prior to expiration.European options can be exercised only at expiration.European options can be exercised any time prior to expiration.
Q:
Which of the following statements is true regarding the writer of a call contract?The call writer expects the stock to move upward.The call writer expects the stock to remain the same or move down.The call writer expects the stock to split.The call writer expects to sell the stock prior to expiration of the option.
Q:
You are asked to invest $30 million in a bond portfolio consisting of only two bonds. Bond A has a duration of 4.36 years, and bond B has a duration of 6.50 years. The portfolio is to have an investment horizon of 5 years. How much of each bond issue would you have to buy to immunize the portfolio?
Q:
Immunization is intended to protect a portfolio against interest rate risk. What should be done? How does it work?
Q:
Why is immunization considered to be a hybrid strategy?
Q:
What are the advantages and disadvantages of index funds for an individual bond investor?
Q:
A client tells you that he strongly believes that interest rates in general will fall abruptly over the next six months. He asks you to recommend bonds for a portfolio to provide capital gains on the interest rate move. Generally, what would you suggest? What if he expected rates to rise?
Q:
What are two passive management strategies? Two active strategies?
Q:
What are the two components of interest-rate risk? How do they work to immunize a portfolio?
Q:
Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?
Q:
An investor desiring a bond investment that changes as little as possible as interest rates change should seek a bond with long duration rather than a strip.
Q:
Convexity is used to correct the approximate percentage change in bond value, calculated using modified duration.
Q:
Holding maturity constant, a decrease in rates will raise bond prices on a percentage basis more than a corresponding increase in rates will lower bond prices.
Q:
For a zero coupon bond, duration is the same as time to maturity.
Q:
Consider Example 18-11 and Table 18-1. Let's say the price is $950.00 rather $974.17 (so the YTM goes to 6.1% from 5.6%). What happens to duration? a. It increases substantially. b. It increases only a little amount. c. It decreases substantially. d. It decreases only a little amount
Q:
Consider Example 18-11 and Table 18-1. What happens to the duration if the coupon rate was 6%, rather than the 5% shown? a No change - duration is based time to maturity b The duration increases to 4.57, as the YTM increases c The duration decreases to 4.38, as more payments come earlier d The YTM is set by the market, so it will not change.
Q:
An example of simultaneous buying of one bond (for example, with fixed rate coupon payments) and selling of another (for example, with variable rate interest payments) occurs when one participates in a:
a. bond ladder strategy.
b. bond swap.
c. interest rate futures transaction.
d. bond portfolio immunization strategy.
Q:
Which of the following European countries experienced a debt crisis in recent years?
a. Germany.
b. Great Britain.
c. Greece.
d. France.
Q:
A major advantage of bond index funds is their:
a. higher performance than regular bond funds.
b. ability to shelter income from taxes.
c. relatively low expense ratios.
d. all of the above are true.
Q:
Which of the following statements regarding duration is INCORRECT?a. Yield to Maturity is inversely related to duration, holding coupon and maturity constant.b. Coupon is inversely related to duration, holding maturity and YTM constant.c. For all coupon-paying bonds, duration equals time to maturity.d. Duration expands with time to maturity at a decreasing rate, holding coupon and YTM constant.
Q:
A bond investor has $100,000 to invest and has determined 10 years is his maximum term. He puts $10,000 in one-year bonds, $10,000 in two-year bonds, $10,000 in three-year bonds, etc. all the way to $10,000 in ten-year bonds. This is an example of:a. bond equalityb. bond ladderingc. bond blendingd. bond term management
Q:
Interest rate risk is composed of:a. market risk and default risk.b. price risk and credit risk.c. price risk and reinvestment risk.d. default risk and money risk.
Q:
James wants to invest in bonds and has a 10 year investment horizon. To immunize his portfolio, he must buy bonds with durations of ________ 10 years. These bonds will have maturities ________ 10 years.a. greater than; less thanb. equal to; less thanc. less than; equal tod. equal to; greater than
Q:
Immunization is a strategy in which bond investors:a. buy only high-quality bonds.b. attempt to avoid default risk.c. attempt to avoid call and convertible risk.d. attempt to avoid reinvestment and price risk.
Q:
Which of the following statements regarding classical immunization is false?a. It is Easy to implement.b. It requires frequent rebalancing.c. It is not a passive bond strategy.d. It faces real-world problems in its implementation.
Q:
One form of interest rate forecasting has the investor evaluating bonds being considered for purchase over a selected holding period in order to determine which will perform the best and is known as:
a. holding-period analysis.
b. time-series analysis.
c. horizon analysis.
d. duration planning.
Q:
A portfolio is said to be immunized if:a. the present value of the cashflows equals the principal.b. the duration of the portfolio is equal to the term.c. the present value of the cashflows is greater than the principal.d. the duration of the portfolio is equal to the investment horizon.
Q:
Which of the following is not a passive bond strategy? a. an immunization strategyb. a bond swap strategyc. a buy and hold strategyd. an indexing strategy
Q:
A bond strategy attempting to immunize the portfolio from interest rate risk is based on the concept of:a. buy and hold.b. horizon.c. duration.d. indexing.
Q:
Which of the following terms describes a change in investors' preferences away from risky assets towards safer bonds?immunizationflight to safetyladderingConvexity
Q:
Yield spreads tend to____ during recessions and ________ during times of economic prosperity.
a. narrow . . . widen
b. widen . . . narrow
c. stay constant . . . widen
d. widen . . . stay constant
Q:
Regardless of its maturity date, it is very unusual for a coupon-paying bond to have duration greater than:a. 3 years.b. 5 years.c. 10 years.d. 15 years.
Q:
Under a laddering approach, investors can mitigate the effects of an increase in interest rates by:
a. purchasing bonds with the same maturity dates and selling short bonds with other maturity dates.
b. purchasing bonds with the same maturity date but different coupon rates.
c. purchasing bonds with different maturity dates.
d. purchasing bonds with different yield to maturity.
Q:
Active bond management strategies include:
a. Forecasting changes in interest rates, identifying abnormal yield spreads between bond sectors, and identifying relative mispricing between fixed income securities.
b. Passive bond index investing.
c. Buy-and-hold bond investing.
d. Ladder investing.
Q:
Yield spreads between corporates and Treasuries will not widen as a result of:
a. accounting scandals, such as those involving WorldCom, Enron, and Tyco in 2002.
b. changes in maturity.
c. financial crisis, such as occurred in 2008.
d. litigation, such as that involving Halliburton and other companies with asbestos exposure.
Q:
One form of interest rate forecasting is:
a. horizon analysis, which requires projections of bond performance over a planned investment period.
b. yield-to-maturity analysis, which requires expectations about reinvestment rates and future market rates to be calculated in expected returns.
c. yield curve analysis, which requires comparisons of different yield curves at different times to maturity.
d. bond immunization analysis, which requires the use of barbells to protect against interest rate risk.
Q:
The yield curve is normally plotted using Treasury securities because:a. they have a wide range of maturities.b. it is easier to obtain accurate and complete data on them.c. they have no default risk.d. it is easier to obtain historical data on them.
Q:
Which of the following is NOT true regarding bond maturities?a. Short maturities sacrifice price appreciation opportunities.b. Longer maturities have greater price fluctuations.c. Short maturities serve to protect the investor when rates are rising.d. Long term interest rates are more volatile than short term interest rates.
Q:
Under the ladder approach, bond investors purchase bonds with different maturities in order to gain some protection from default risk.
Q:
The term structure of interest rates shows the relationship between yields of several categories of bonds, such as municipals and corporates, and their maturities.
Q:
A weaker dollar increases the value of dollar-denominated assets to foreign investors.
Q:
Yield spreads were at their widest during the Great Depression.
Q:
A bond swap involves the simultaneous selling of one bond and buying another.
Q:
The term structure of interest rates consists of a set of forward rates and a current known rate.
Q:
One of the most cost-effective methods of passive bond investing is buying into a bond ETF.
Q:
An increase in expected inflation tends to decrease bond prices and bond yields.
Q:
If interest rates rise, reinvestment rates rise, whereas bond prices decline.
Q:
Under the expectations theory, investors expecting interest rates to rise will:a. invest more now in short term bonds rather than in long term bonds.b. invest more now in long term bonds rather than in short term bonds.c. invest more now in Treasury bonds rather than in corporate bonds.d. invest more now in corporate bonds rather than in Treasury bonds.
Q:
The term structure of interest rates is also known as the:a. yield to maturity.b. probability distribution.c. yield differential.d. yield curve.
Q:
We can think of duration as the slope of a line that is tangent to the convex:a. price-yield curve at the expected future price and expected yield of the bond.b. price-yield curve at the current price and expected yield of the bond.c. price-yield curve at the current price of the bond.d. price-yield curve at the current price and yield of the bond.
Q:
Since the 1930s, the yield curve has most often been:upward sloping yield curve.downward sloping yield curve.flat yield curve.skewed yield curve.
Q:
Floating rate bonds often have yields tied to:a. London Interbank Offered Rate (LIBOR) plus some percentage yield amount.b. London Interbank Offered Rate (LIBOR).c. European Central Bank (ECB) borrowing rate.d. Federal Funds overnight lending rate.
Q:
Bond investors can avoid the risk that interest rates will rise and incur capital losses by:a. buying zero coupon bonds.b. buying Treasury bonds with maturities of one year or longer.c. holding bond funds till maturity.d. holding individual bonds till maturity.
Q:
The size of yield spreads tends to remain constant over time.
Q:
A noncallable bond would be expected to have a higher yield to maturity than a comparable callable bond.
Q:
A commercial bank that always invested in short-term bonds in order to meet deposit withdrawals is a good example of the liquidity preference theory.
Q:
Which of the following statements concerning yield spreads is not true?a. Yield spreads may be positive or negative.b. Yield spreads are often calculated by changing the maturity of the different bonds.c. Yield spreads are influenced by the level of interest rates in the market.d. Yield spreads can change over time.
Q:
Investors would expect a higher yield on a smaller, regional corporate bond than on a large, national corporate bond mainly due to:a. differences in coupon rates.b. differences in quality.c. differences in tax treatments.d. differences in marketability
Q:
During periods of economic expansion, the spread between corporate bonds and U.S. Treasury generally:a. widens.b. narrows.c. stays the same.d. is always negative.
Q:
Which of the following is considered to have the biggest impact on bond yields?a. economic growthb. business cyclesc. inflationd. Federal Reserve actions
Q:
Which of the following statements is true regarding investments in bonds?a. shorter maturities should return more than longer maturities, in generala. Treasury bonds should return more than corporate bonds of the same maturityb. longer maturities should return more than shorter maturities, in generalc. lower-rated issues should return less than higher rated issues at maturity.
Q:
The introduction of the Euro is expected to:a. increase the transactions cost of trading foreign bonds.b. decrease the transactions cost of trading foreign bonds.c. have no effect on the transactions cost of trading foreign bonds.d. have a minimal effect on the transactions cost of trading foreign bonds.
Q:
Which of the following statements is most correct?
a) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the shortest term federal securities.
b) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the longest term federal securities.
c) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the shortest term federal securities, plus a forecast of the rate of inflation for the period of the securities.
d) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the longest term federal securities, plus a forecast of the rate of inflation for the period of the securities.