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Review of Elementary Finance Tools Part 1

1. If you invest $5000 in a CD with an interest rate of 8% per year, how much will you have at the end of 5 years? Round off your final answer to two digits after the decimal point. State your answer as “x.xx’”

Enter answer here

7346.64

2. What is the present value of $100,000 paid at the end of ten years, if your opportunity cost is 5 percent per year? Round off your final answer to three digits after the decimal point. State your answer as “x.xxx’

Enter answer here

61391.325

3. If the annual interest rate is 4 percent, which one would you prefer?

  • Receive $18,000 one year from now?
  • Receive $23,000 two years from now?
  • Receive $25,000 three years from now?

4. If your goal is to maximize your investment value at the end of five years, which option would you prefer?

  • Investing $9,000 today at an interest rate of 3 percent per year
  • Investing $8,000 today at an interest rate of 5 percent per year
  • Investing $9000 today at an interest rate of 2 percent per year for two years and then at an interest rate of 4 percent per year for the last three years
Review of Elementary Finance Tools Part 2

1. Which one would you prefer?

a. Receive $10,000 now

b. Receive $1,000 every year for 13 years (the last payment occurs at the end of 13 years), if the interest rate is 4 percent per year.

  • Receive $10,000 now
  • Receive $1,000 every year for 13 years (the last payment occurs at the end of 13 years), if the annual interest rate is 4%

2. How much would you have saved in twenty years if you save $5000 every year and can guarantee earning 6% per year? Round your final answer to three digits after the decimal. State your answer as ‘x.xxx’

Enter answer here

183927.956

3. You are buying a new car. The car dealer gives you three financing options. If your objective is to minimize the present value of your car payments and your opportunity cost of capital is 0.5% per month, which one would you choose?

  • $500 per month for 36 months
  • $600 per month for 24 months
  • $350 per month for 48 months

4. You are buying a new house for $450,000. Reviewing different financing options, you have determined that you would like to minimize your monthly payment. Which financing option would you choose? Assume monthly payments over the life of the mortgage.

  • 30 year mortgage with annual interest rate of 3.5 percent
  • 20 year mortgage with an annual interest rate of 3 percent
  • 15 year mortgage with an annual interest rate of 2.8 percent
Review of Elementary Finance Tools Part 3

1. True or False:

An annual interest rate quoted at 6 percent compounded monthly means interest is paid at a rate of 6% each month.

  • True
  • False

2. What is the effective annual rate on 1 –year CD with a stated annual rate of 8% compounded quarterly? Round off your final answer to three digits after the decimal point. State your answer as a percentage ‘x.xxx’ (i.e. 1.234)

Enter answer here

8.243

3. What is the effective six-month rate if the stated annual rate is 8% compounded quarterly? Round off your final answer to two digits after the decimal point. State your answer as as percentage ‘x.xx’ (i.e. 1.23)

Enter answer here

4.04

4. What is the effective six-month rate if the stated annual rate is 8% compounded monthly? Round off your final answer to three digits after the decimal point. State your answer as a percentage ‘x.xxx’ (i.e. 1.234)

Enter answer here

4.067

5. What is the five-year effective rate if the stated annual rate is 6% compounded semi-annually? Round off your final answer to three digits after the decimal point. State your answer as a percentage rate ‘x.xxx’ (i.e. 1.234)

Enter answer here

34.392

6. Which one would you prefer as an investment return?

  • A stated annual rate of return of 6%, compounded monthly
  • A stated annual rate of return of 7%, compounded quarterly
  • A stated annual rate of return of 6.5%, compounded semi-annually
  • A three-month rate of 2%, compounded quarterly

7. What is the effective 3-month return on a 1-year certificate of deposit with a stated annual rate of 8% compounded quarterly?

  • 2%
  • 2.67%
  • 4.63%
  • 4.04%
Review of Elementary Finance Tools Part 4

1. How much would you be willing to pay today for the opportunity to receive $10,000 every year forever if the interest rate is 5% per year? (Assume you can bequest it to someone else). Round your final answer to the nearest dollar.

Enter answer here

200000

2. How much would you be willing to pay today for the opportunity to receive $1000 every month forever if the interest rate is 5% per year? (Assume you can bequest it to someone else). Round off your final answer to the nearest dollar.

Enter answer here

240000

3. How much would you have to donate to your alma mater so that a scholarship of $2000 that grows at an annual rate of 2% can be created in your name one year from today if your endowment can be invested at an annual rate of 4%? Round off your answer to the nearest dollar.

Enter answer here

100000

4. Which one would you prefer if your opportunity cost of capital is 6 percent per year?

  • Receiving $150,000 today
  • Receiving $100,000 today and a stream of cash flows every month for the next 36 months starting next month with $1250 every month and growing by 0.125% every month
  • Receiving $750 every month forever starting today
  • Receiving $25000 today and a stream of cash flows every month forever starting with $500 next month growing by 0.125%
Module 1: Review of Elementary Finance Tools

1. Bob and Jane Loveboat are saving to buy a boat at the end of 5 years. If the boat costs $25,000, and they can earn 8 percent a year on their savings, how much do they need to put aside at the end of every year 1 through 5? Round off your final answer to three digits after the decimal point. State your answer as ‘x.xxx’

Enter answer here

4261.411

2. You made your fortune in the dot-com boom (and got out in time!) As part of your legacy, you would like to endow an annual scholarship at your alma mater. You want it to be memorable, so you would like the scholarship to be $20,000 per year. If the university earns 8% on its investments, and if the first scholarship is to be given out in one year’s time, how much will you need to donate to create the scholarship fund? Round your final answer to the nearest dollar.

Enter answer here

250000

3. Assuming that the annual interest rate is 7%, how much would you pay to receive $100 every year, growing at 5%, annually, forever? Round off your final answer to the nearest dollar.

Enter answer here

5000

4. What is the future value three years from now of $1000 invested in an account with a stated annual interest rate of 8%, if compounded semi-annually? Round off your final answer to three digits after the decimal. State your answer as ‘x.xxx’

Enter answer here

1265.319

5. What is the future value three years from now of $1000 invested in an account with a stated annual interest rate of 8%, if compounded monthly? Round off your final answer to three digits after the decimal point State your answer as ‘x.xxx’

Enter answer here

1270.237

6. You want to lease a set of golf clubs from Holes, Ltd. The lease contract is in the form of 24 equal monthly payments at a 12 percent, compounded monthly. Since the clubs cost $4,000 retail, Holes wants the present value of the lease payments to equal $4,000. Suppose you first payment is due immediately. What will your monthly lease payment be? Round off your final answer to one digit after the decimal point. State your answer as ‘x.x’

Enter answer here

186.4

7. You want to retire a millionaire when you are 65. Currently, you have $20,000 in savings and are 30 years old. How much will you have to save each year for the next 35 years in order to have $1,000,000? Assume you earn 9% on your savings every year. Round off your final answer to three digits after the decimal point. State your answer as ‘x.xxx’

Enter answer here

2743.121

8. You decide to buy a home for $100,000. You approach two banks for financing. If you want to minimize your monthly payments, which one would you choose?

  • Bank #1 requires a 10% down payment and requires monthly payments on a 20-year mortgage sufficient to earn it an effective annual return of 8%.
  • Bank #2 also needs a 10% down payment and also has a 20-year mortgage, but quotes a 8% annual rate which is compounded monthly.

9. Leeds Autos has just announced its new promotional deal on the new $45,000 Z4 Roadster. You pay $5,000 down, and then $1000 for the next 40 months. Its next door competitor, Chatham Hill Autos will give you a $3000 off the list price straight away. If the interest rate is 6% a year, which company is giving a better deal?

  • Leeds Autos
  • Chatham Hill Autos

10. Your parents make you the following offer: They will give you $5000 at the end of every six months for the next five years if you agree to pay them back $5000 at the end of every six months for the following ten years. Should you accept this offer if your opportunity cost of funds is 18% per year, compounded semiannually?

  • Yes
  • No

Week- 2

PRACTICE QUIZ
A primer on financial assets

1. Real assets such as buildings, machines, land and knowledge are:

  • The means of production of goods and services of an economy.
  • The means by which individuals in an economy can hold the income generated by the real assets in the process of production of good and services.
  • None of the above.

2. TRUE OR FALSE.

Financial assets are securities in which individuals can invest their wealth with the expectation to obtain a return in the future.

  • FALSE.
  • TRUE
PRACTICE QUIZ
Basics of Bond Valuation

1. You expect the Federal Reserve will begin to loosen credit and force yields down by 50 basis points across all maturities in the very near future. (A basis point is equal to 1/100th of 1 percent so 50 basis points are equal to ½ of 1%.) How do you expect the Fed’s policy effect will show up in the bond market?

  • Bond prices will decrease.
  • Bond prices will increase.
  • Bond prices will remain the same.
  • Not enough information.

2. The price of a US government issued five year zero coupon bond, with a face value of $1000, is $744.09. What is the yield to maturity of the bond if the interest is compounded yearly? Round off your final answer to two digits after the decimal point. State your answer as a percentage rate (i.e. x.xx)

Enter answer here

6.09

3. What is the market value of a 20-year bond with face value of $1000, which makes quarterly coupon payments at a coupon rate of 10%, if the required rate of return is 8% per year, compounded quarterly? Round off your final answer to three digits after the decimal point. State your answer as ‘x.xxx’

Enter answer here

1198.723

4. Consider a bond, which pays $80 in annual coupon, and has a face value of $1,000. What is its yield to maturity if the bond has 20 years remaining until maturity and currently selling for $1,200?

  • 8.32%
  • 9.67%
  • 6.22%
  • 8.77%

5. You have just purchased a newly issued $1,000 five-year Vanguard Company bond at par. This five-year bond pays $60 in semi-annual coupon payments ($60 every six months). You are also considering the purchase of another Vanguard Company bond that pays $30 in semi-annual coupons and has six years remaining before maturity. This bond also has a face value of $1000. Both bonds make coupon payments semiannually.

What is the yield-to-maturity on the five-year bond? State your answer as a percentage rate.

Enter answer here

12

6. Refer to back to Question 5. What is the effective annual yield on the five-year bond? Round off your final answer to two digits after the decimal point. State your answer as a percentage rate (i.e ‘x.xx’)

Enter answer here

12.36

7. Refer back to Question 5. Assume that the five-year bond and the six-year bond have the same yield. What should you be willing to pay for the six-year bond? Round off your final answer to three digits after the decimal point. State your answer as ‘x.xxx’

Enter answer here

748.485

8. Suppose that you purchased a 15-year bond that pays semi-annual coupon of $20 and is currently selling at par. What would your realized annual return be if you sold the bond five years later when the yield is 5.5%? State your answer as a percentage rate rounded to three digits after the decimal point, i.e. ‘x.xxx’

Enter answer here

1.807
Calculating Treasury Bill Prices

1. The financial press conventionally reports Treasury bill prices as:

  • Discounts from $100 face value for 360-day
  • Discounts from $100 face value for 365-day
  • None of the above

2. What would be the price of a U.S Treasury bill with a face value of $ 100,000 that has 180 days left to maturity and has a discount quote of 0.358%?

  • 99,821.00
  • 98,851.36
  • 99,713.66
  • 94,456.36

3. A $100,000 face value Treasury bill with 54 days to maturity is selling for $98,999. What is the yield to maturity on this security? Round off to two-digits after the decimal point. State your answer as a percentage rate (if your answer is one point two three percent, input 1.23) Please consider the year as 360 days when calculating the yield

Enter answer here

6.74

4. Refer back to question 3. What is the effective annual yield? Round off to two digits after the decimal point. State your answer as a percentage rate (if your answer is one point two three percent, input 1.23)

Enter answer here

6.94
Long-term debt instruments

1. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page8.php

Using the first graph and the data on the Federal Reserve Bank of Philadelphia Survey of Professional Forecasters and the University of Michigan Survey Research Center’s Survey of Consumer, look up what the professionals’ consensus forecast for inflation rate over the next year is. What do the consumers expect to happen to inflation over the next year?

What do you think?
Your answer cannot be more than 10000 characters.

increase

2. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page8.php

Now look at the second graph on the page. What can you conclude on the 10-year ahead inflation expectations and realizations? Is the forecast error positive or negative?

What do you think?
Your answer cannot be more than 10000 characters.

positive

3. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page8.php

Now look at the third graph on the page. How have the Treasury spreads moved over time?

What do you think?
Your answer cannot be more than 10000 characters.

steady rise

4. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page8.php

Again, look at the third graph on this page. Have real interest rates increased, decreased or remained the same over the last two years?

What do you think?
Your answer cannot be more than 10000 characters.

decreased

5. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page9.php

What has happened to short-term nominal interest rates over the last two years? How does the three-month rate on AA non-financial commercial paper rate compare the three-month Treasury rate?

What do you think?
Your answer cannot be more than 10000 characters.

remains the same

6. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page9.php

What has happened to long-term nominal interest rates over the last two years? Again compare the 10-year rate on Treasurys vs. 10-year Moodys AA-rated corporate bond yield.

What do you think?
Your answer cannot be more than 10000 characters.

both the values have declined

7. Go to the Economic Research website (FRED) maintained by the Federal Reserve Bank of St. Louis:

https://research.stlouisfed.org/datatrends/mt/page9.php

What are the most recently available levels of 3-month and 10-year yields on Treasury securities?

What do you think?
Your answer cannot be more than 10000 characters.

LIBOR, Eurodollar

8. Which of the following corporate bonds would you expect to have a higher yield?

  • Secured bonds
  • Callable bonds
  • Convertible bonds

9. Which of the following correctly describes a repurchase agreement?

  • The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.
  • The purchase of a security with a commitment to purchase more of the same security at a specified future date.
  • The sale of a security with a commitment to repurchase the same security at a future specified date at a future negotiated price.

10. What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?

  • The spread is likely to increase.
  • The spread is likely to decrease.
  • It would not change.

11. Which of the following statements is correct? (There may be multiple answers)

  • The interest rate on Treasury Inflation Protected Securities (TIPS) is a risk-free real rate.
  • The par value on TIPS is tied to the Consumer Price Index.
  • The coupon payments made on a TIPS remain constant in nominal terms through its maturity.
  • The par value on TIPS remains constant in real terms.

Week- 3

PRACTICE QUIZ
Equity Securities

1. You expect the price of FBG stock to be $69.77 per share a year from now. Its current market price is $60, and you expect it to pay a annual dividend of $1.75 per share a year from now. What is the stock’s expected dividend yield? State your answer as a percentage rate rounded off to two digits after the decimal point, i.e. ‘x.xx’

Enter answer here

2.92

2. Refer back to Question 1. What is your expected total return on FBG stock? State your answer as a percentage rate rounded to one digit after the decimal point, i.e ‘x.x’

Enter answer here

19.2

3. Which one of the following statements is true about the differences between debt and common stock?

  • Debt is ownership in a firm, but equity is not.
  • Creditors have voting power, while stockholders do not.
  • Periodic payments made to either class of security are tax deductible for the issuer.
  • Interest payments are promised, while dividend payments are not.

4. Two of the main indexes that equity investors keep track of are the Dow Jones Averages (DJIA) and the Standard & Poor’s Composite 500 (S&P 500). The difference between these two indexes is:

  • The DJIA is a price weighted average of the stocks of 30 companies and (S&P 500) is a market value weighted index of 500 companies.
  • The DJIA is more volatile than the Standard & Poor’s Composite 500 (S&P 500).
  • None of the above.

5. Scubaland, Inc. is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18 percent during the next two years, 15 percent in the third year, and 6 percent thereafter. Yesterday, Scubaland paid a dividend of $1.15. If the required rate of return on the stock is 12 percent, what is the price of a share of the stock today? Round off your final answer to three digits after the decimal point. State your answer as ‘x.xxx’

Enter answer here

26.955

6. A firm’s preferred stock often has a dividend yield that is lower than its bonds because:

  • Preferred stock generally carries a higher rating.
  • Owners of preferred stock have a prior claim on the firm’s earnings.
  • Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation.
  • Corporations owning stock may exclude from income taxes most of the dividend income they receive.

7. Gemini Industries has just paid its annual dividend of $3 per share. Analysts expect the dividend to grow at a constant growth rate of 4% indefinitely. If the stock is currently trading at $54, what is the market’s required rate of return on this stock? Express your answer as a percentage rate rounded off to two digits after the decimal point, i.e. ‘x.xx’

Enter answer here

9.78

8. If GE stock is trading at $19.72 and the last quarterly dividend payment was $0.17 per share, what is GE’s annual dividend yield? Express your answer as a percentage rate rounded off to two digits after the decimal point, i.e. ‘x.xx’

Enter answer here

3.45

9. What is the value of a preferred stock that pays a fixed dividend of $2 per share if the discount rate is 8%? Round off your final answer to the nearest dollar.

Enter answer here

25

10. Suppose that the company XYZ has just won a major contract. This lucrative contract will enable it to increase the growth rate of its dividends from 5% to 6% without affecting the projected current dividend of $3.00 per share. If the current share price is $57.14, what will happen to the share price upon announcement of this good news?

  • The price will jump by 6%.
  • The price will jump by 1%.
  • The price will increase to $62.28
  • The price will increase to $70.59
Derivative securities

1. A derivative security is:

  • A type of financial asset that is traded frequently in money markets.
  • A type of fixed income instrument similar to bonds and commercial paper traded in capital markets.
  • A type of financial asset whose value depends on the value of another underlying asset such as stock, commodity, index, reference rates.

2. Select which of these securities are examples of derivatives securities.

  • A. Options and futures
  • B. Swaps and forwards contracts
  • C. Stocks and bonds
  • A and B

3. The difference between derivatives traded on exchanges and in the over the counter (OTC) market is:

  • A. On an exchange, an investor can obtain a derivative contract that is tailored to his needs.
  • B. Exchnage-traded contracts are standardized and defined by the exchange, but in over the counter derivatives (OTC) contracts are customized and transactions costs are higher.
  • C. In exchange traded markets there is no counterparty risk since there exists a clearinghouse.
  • B and C.

4. Which of the following positions do you think would be the most risky transaction to take in the stock index option markets if the stock market is expected to increase substantially after you complete the transaction?

  • A short call option
  • A short put option
  • A long call option
  • A long put option

5. Suppose RIO stock has both currently call and put options traded. What would your profit at the expiration date be if you buy the 3-month call option with an exercise price of $60 for $4 and at the same time buy the 3-month put option with the same exercise price for $6 today if the RIO stock trades for $48 in three months?

Enter answer here

2

6. The main difference between a futures and a forward contract is:

  • A. Forward contracts are traded over the counter and are customized, but futures are standardized contracts and are traded on organized exchanges.
  • B. Future contracts can take only financial assets as the underlying asset.
  • None of the above.
  • A and B.

7. Which of these options on the same stock should sell at a greater price?

  • A 6-month call option with an exercise price of $40
  • A 6-month call option with an exercise price of $35

8. Suppose that a trader enters into a long corn futures position for 5000 bushels with a delivery date on December 2017 and a future price of $3.902 per bushel. What is the payoff to this position if on the delivery date, the spot price of corn is $4.0995 per bushel? Round off your final answer to the nearest dollar.

Enter answer here

988

9. Assuming all other relevant features of the stocks and options are identical, which of these options should sell at a lower price?

  • A put option on a stock with a market price of $50
  • A put option on a stock with a market price of $60

10. You are a portfolio manager who uses options positions to custom the risk profile of your clients. Your portfolio’s performance to date is up 16%. Your client’s objective is to earn at least 15%. You expect that there is a good chance of large losses between now and the end of the year. What strategy is best given your client’s objective?

  • Long put options
  • Short call options
  • Long call options

11. Suppose you will receive your bonus next month. You hope to invest it in long-term corporate bonds. You believe that bonds are currently selling at quite attractive yields How would you use financial futures to hedge your risk?

  • Go long in bond futures
  • Go short in bond futures

12. Suppose you have just received 10,000 shares of your company stock as part of your compensation package. The stock currently sells $30 a share. You would like to defer selling the stock until the next tax year. In January, however, you will have to liquidate your holdings in order to provide a down payment on your new house. You are therefore worried about the price risk associated with keeping your shares of stock. If the value of your stock holdings fall below $250,000, your ability to come up with the necessary down payment would be jeopardized. On the other hand, if the stock value rises to $350,000, then you might be able to maintain a small cash reserve even after making your down payment. Which of these investment strategies would you choose?

  • Writing January call options on your company shares with an exercise price $35. These are currently selling for $3 each.
  • Buying put options with an exercise price of $25. These options are also selling for $3 each.
  • Establishing a zero-cost collar position by writing the January calls and buying the January puts.

13. You have a client who believes that the shares of MexCon, currently trading at $48 per share, could move significantly in either direction in response to an expected court ruling involving the company. Your client currently owns no MexCon shares but asks you for advice to implement a strangle strategy to profit from the possible price movement. A strangle is a portfolio of a put and a call with a higher exercise price but with the same expiration date. Currently, MexCon stock has a 3-month call option with an exercise price of $50 selling for $4, and a 3-month put option with an exercise price of $45 selling for $3. Which of the two strategies would you recommend your client?

  • A long strangle strategy
  • A short strangle strategy

14. Suppose you are an oil distributor planning to sell 100,00 barrels of oil eight months from now. You would like to hedge against a possible decline in oil prices. Which position would you take?

  • A short hedge taking a short futures position
  • A long hedge taking a long futures position

15. Why does a speculator who wants to bet on the direction of the price of an underlying asset buy a futures contract instead of buying the underlying asset itself?

  • A. Futures contracts require only a fraction of the value to be deposited compared to the value of the asset underlying the contract.
  • B. Speculators are attracted to futures because the futures market appears more sophisticated.
  • C. Speculators are not allowed to trade in the underlying asset.
  • D. Transaction costs in the futures markets are far smaller.
  • A and D
Module 3: Financial assets – Equities and derivatives

1. Earnings and dividends per share at G3-Biz Inc. are expected to grow at a rate of 18 percent over the next two years, then at 15 percent in the third year, and then at 6 percent thereafter. G3- Biz just paid a dividend of $1.15. If the required rate of return on the stock is 12 percent, what is the price of a share of G3-Biz stock today? Round off to two decimal points. (i.e. “x.xx”)

Enter answer here

26.95

2. Suppose that the company XYZ is going to pay a dividend of $1.50 per share next year, and the dividend is expected to grow by 10% forever. If investors require a 13%, what should the value of XYZ’s stock be?

  • 55
  • 50
  • 62
  • 65

3. Suppose that the stock of the company CFAA is currently trading on April 15 at a price of $70. A call option with a strike price of $70 and an expiration date on October 15 is trading at $4. What is your profit if the stock price at expiration date is $80? Remember that each option contract is for 100 shares.

Enter answer here

600

4. Suppose that a trader enters into a long futures position for 1000 oil barrels with a delivery date on December 2016 and a future price of $40 per barrel. Suppose that on delivery date, the spot price of oil is $45 per barrel. What is the payoff to the long position?

Enter answer here

5000

5. Suppose your research shows that technology stocks currently provide an expected rate of return 12%. BMI, a large computer company, is expected to pay a dividend of $2 per share at the end of the year. If the stock is currently selling at $48 per share, what is the market’s expectation of growth at BMI?

  • 6.53%
  • 7.83%
  • 4.17%
  • None of the above

6. An investor purchases a stock for $28 and a put on the stock for $0.40 with a strike price of $24. She also sells a call on the same underlying stock for $0.40 with a strike price of $30 and with the same expiration date. What is the value of her portfolio, net of the proceeds from the options, if the stock price ends up at $35 on the expiration date?

Enter answer here

7. Which of the following is correct about the over-the-counter markets?

  • a. The counterparty risk is eliminated.
  • b. There is no clearing house.
  • c. Futures are traded in OTC markets.
  • d. Both b and c are correct.

8. A spread is a combination of two or more call options on the same stock with differing exercise prices or times to maturity. Some options are bought, and others are sold. Consider a bullish spread option strategy where you buy a call option with a $35 exercise price priced at $4 and sell a call option with a $50 exercise price priced at $2.50. If the price of the underlying stock increases to $60 at expiration and each option is exercised on the expiration date, what is your net profit?

  • 8.50
  • 13.50
  • 16.50
  • 23.50

9. Suppose you are a U.S. investor who is harmed when the dollar depreciates. Specifically, suppose that your profits decrease by $200,000 for every $0.05 rise in the dollar/pound exchange rate. If the pound futures contract on the Chicago Mercantile Exchange calls for delivery of 62,500 pounds, how many contacts will you need to enter to hedge? Will you take the long or the short side of the contracts?

  • 64 contracts short
  • 64 contracts long
  • 32 contracts short
  • 32 contracts long

10. You know that many corporate bonds are issued with call provisions that allow the issuer to buy bonds back from the bondholders at some time in the future at a specified call price. Which of the following is correct?

  • This is similar to the bond issuer holding a call option with an exercise price equal to the price at which the bond can be repurchased.
  • This is similar to the bondholder owning a call option with an exercise price equal to the price at which the bond can be repurchased.
  • This is similar to the bond issuer holding a put option with an exercise price equal to the price at which the bond can be repurchased.
  • This is similar to the bondholder owning a put option with an exercise price equal to the price at which the bond can be repurchased.

Week- 4

PRACTICE QUIZ
Organization of financial markets

1. In this module we defined financial intermediaries as institutions that facilitate between suppliers and borrowers of capital. Which of the following is NOT a financial intermediary?

  • Insurance company
  • Investment company
  • Pension fund
  • Credit Unions
  • None of the above.

2. Which of the following is true?

  • Open-end funds will redeem shares for asset value at the request of the investor. Closed-end funds do not redeem shares and are traded like other securities.
  • Share price of a closed end fund can often deviate from its net asset value.
  • Hedge funds are subject to much less regulation than mutual funds.
  • Unlike mutual funds which can be traded only at the end of the day when net asset value is calculated, exchange-traded funds can be traded throughout the day like any other share of stock.
  • All of the above.

3. If you decide to sell your Facebook shares to another investor…

  • A. This is a transaction that takes places in the primary market.
  • B. This is a transaction that takes place in the secondary market.
  • C. This transaction will have an impact on the total number of outstanding shares of Facebook.
  • D. Both B and are C are correct.

4. Which of these statements are true?

  • A private placement is easier and less costly to a private firm compared to an IPO.
  • Private placements can be used by both private and public firms that wish to raise funds from a limited number of investors.
  • Privately placed shares are traded on exchanges.
  • Private placements often lead to seasoned equity offerings.

5. Which of the following is true about the IPO process?

  • A. The entire offering by the issuing company has to be purchased by the underwriter.
  • B. The underwriter can either purchase the entire offering from the issuing company or only facilitate the sale of shares to the public.
  • C. The return on an IPO is always guaranteed.
  • Both B and C are correct.
PRACTICE QUIZ
Trading mechanics

1. Which of the following statements is true about limit orders?

  • A. A limit order controls the price but does not guarantee that the order will be filled.
  • B. Limit orders are executed at the best price available.
  • C. A limit order is recorded in the limit order book until it can be executed.
  • Both A and C

2. You are concerned about the value of your holdings in company A shares. You instruct your broker to sell your shares when the price falls down to $30 per share. What type of order is this?

  • A market order
  • A stop-loss order
  • A stop-buy order

3. You would like to liquidate your shares in company B, but you only want to sell them if the price is at least $25 per share. What kind of order would you place with your broker?

  • A market order
  • A limit order
  • A stop-loss order
  • A stop buy order

4. Which of the following is true?

  • A maintenance margin is the minimum amount the margin account can decline to without an investor having to take any action.
  • A maintenance margin is the maximum amount the margin account can decline to without an investor having to take any action.
  • A maintenance margin is the amount that the margin account must be kept at all times.

5. Which of the following statements is true?

  • A margin call is a request to sell the securities that you have on your account
  • A margin call is a request to buy more of the securities you already have.
  • A margin call is a request to add more capital to your margin account indicating that the investor’s margin balance has fallen below the maintenance requirement.
  • A margin call is prank call by marginal investors.

6. Suppose the initial margin requirement is 5% and you want to purchase 100 shares of Beta stock currently trading at $20 a share. How much would you have to deposit in the margin account to meet this requirement?

Enter answer here

100

7. Consider your holdings in Beta stock in Question 6. Let’s suppose that the maintenance margin requirement is 4%. If you get a margin call stating that your margin has fallen down to 2.564%, what is the current price of Beta stock?

Enter answer here

19.5

8. Suppose that you expect that Bubblenet stock price is going to decline. So you decide to ask your broker to short sell 1000 shares. The current market price is $50. The proceeds from the short sale $50,000 is credited into your account. A few days later the market price of the stock declines to $30 per share. What is your profit from this transaction?

Enter answer here

20000

9. Suppose your broker has 50% margin requirements for short sales and you short 500 shares of GS-Biz Inc., currently trading at $50 per share. What is the amount that you need to deposit in the margin account to serve as margin on the short sale?

Enter answer here

12500

10. Suppose you happened to be wrong on the direction of GS-Biz in Question 9. Instead of falling in value, GS-Biz price starts climbing. If the broker has 30% maintenance margin requirement, how much can the price of GS-BIz rise before you get a margin call?

Round off to one decimal points. (i.e. “x.x”)

Enter answer here

57.7

Module 4: Organization of financial markets and securities trading

1. The difference between mutual funds and Exchange traded funds (ETFs) is…

  • ETFs shares are traded on exchanges all the time but mutual funds shares can be only traded at the end of the day when their net asset value is calculated.
  • There is more variety of shares in mutual funds than on ETF’s
  • None of the above.

2. Suppose that you expect SugarCane stock price to decline. So you decide to ask your broker to short sell 2000 shares. The current market price is $40. The proceeds from the short sale $80,000 is credited into your account. However, a few days later the market price of the stock jumps to $80 per share and your broker asks you close out your position immediately. What is your profit or loss from this transaction?

  • -60000
  • 60000
  • -80000
  • 80000

3. An investor has an initial margin requirement of 50% on his margin account and a maintenance margin requirement of 25%. The investor short sold 1,000 shares at $ 40 per share. What is the maximum price that the share can reach in the market before the investor receives a margin call?

Enter answer here

48

4. True or False.

An investment company is an institution that pools funds from investors with the purpose of investing on their behalf. There can be registered investment companies: mutual funds, unit investment trusts, and real estate investment trust.

  • True
  • False

5. True or False.

Private equity is one example of investment companies that are not registered with the SEC and make equity investment in companies that are not publicly traded.

  • True
  • False

6. The difference between mutual funds and hedge funds is…

  • There is no difference since there are both managed portfolios
  • Hedge funds are not registered with the SEC since accepts only qualified investors such as high net worth individuals and institutional investors.
  • None of the above.

7. A market order has

  • Price uncertainty but no execution uncertainty
  • Both price and execution uncertainty
  • Execution uncertainty but no price uncertainty

8. You are bullish about Bulls Eye stock. The current price is $25 per share and you have $5000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest 10,000 in the stock. What will be your rate of return if the price of Bulls Eye stock goes up by 10% during the next year? Enter your answer as percentage. “Ex if the answer is 30% enter 30”

Enter answer here

12

Conclusion

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