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1) As time progresses (and the maturity date approaches) and yields remain constant, a premium bond’s price will ________. a) Increase b) Decrease c) Remain unchanged d) Fluctuate unpredictably e) Approach zero 2) Consider a bond with a par value of $1,000 currently trading at $940. The bond pays a semi-annual coupon of $22.50 ($45 annually). What are the nominal and current yields, respectively? a) 4.5% and 4.5% b) 4.5% and 4.79% c) 3.5% and 4.25% d) 4.79% and 4.5% e) 2.25% and 4.50% 3) The duration of a coupon paying bond is ________ related to its term to maturity and _______ related to its coupon rate. a) Directly, directly b) Directly, inversely c) Inversely, directly, d) Inversely, inversely e) Not, directly 4) The duration of a coupon paying bond is ________ its term to maturity, while the duration of a zero-coupon bond is _______ its maturity. a) Equal to, less than b) Less than, greater than c) Less than, equal to d) Greater than, equal to e) Equal to, greater than 5) Which of the following is a necessary, but insufficient, condition for immunizing a single cash flow liability? a) The present value of the assets must exceed the present value of the liability b) The duration of the assets must be less than the duration of the liability c) The duration of the assets must be equal to the duration of the liability d) The duration of the assets must be more widely dispersed than that of the liability e) The present value of the assets must be less than the present value of the liability 6) Theoretically, in the long run, the value of Tobin’s Q should trend towards a) 0.0 b) 1.0 c) 2.0 d) 1.5 e) No theoretical equilibrium value 7) The value of a share of stock is __________ related to its expected dividend growth rate and _________ related to its risk level. a) Directly, indirectly b) Directly, directly c) Indirectly, directly d) Indirectly, indirectly e) Directly, not 8) Assuming a firm is expected to produce a constant growth rate in its per share dividend forever and a constant return on equity, the stock price should grow at a rate equal to a) The required return as postulated under the CAPM b) Its return on equity c) Its dividend payout ratio d) Its return on equity times its earnings retention ratio e) Its earnings retention ratio 9) Of the following, which is generally the best estimate of the minimum (floor) value of a company’s stock (equity)? a) Book value b) Current market value c) Replacement cost d) Liquidation value e) Net current asset value 10) Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? a) $9.09 b) $10.10 c) $11.11 d) $12.21 e) None of the above 11) A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock? a) $27.27 b) $37.50 c) $42.37 d) $66.67 e) $70 12) Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: I. Stock A will give us a higher return than Stock B. II. An investment in stock A is probably riskier than an investment in stock B. III. Stock A has higher forecast earnings growth than stock B. a) I only b) I and II only c) I and III only d) II and III only e) All of the above 13) A firm increases its plowback ratio (earnings retention ratio). All else equal, you know that _____________. a) Earnings growth will increase and its P/E ratio will increase b) Earnings growth will decrease and its P/E ratio will decrease c) Earnings growth will increase and its P/E ratio will decrease d) Earnings growth may or may not change, but its P/E ratio will definitely increase e) Earnings growth will increase, but its P/E ratio may or may not change 14) A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO? a) $23.57 b) $15 c) $19.78 d) $21.34 e) $22.48 15) If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? a) 4.3% b) 4.5% c) 4.7% d) 4.9% e) None of the above 16) Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. a) Risk b) Marketability c) Call protection d) Taxation e) Liquidity 17) The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity a) I only b) I and II only c) I and III only d) II and III only e) I, II, and III 18) Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. a) Higher b) Lower c) The same d) Indeterminate e) All of the above 19) You can be sure that a bond will sell at a premium to par when _________. a) Its coupon rate is greater than its YTM b) Its coupon rate is less than its YTM c) Its coupon rate is equal to its YTM d) Its current yield is equal to its YTM e) Its current yield is greater than its YTM 20) An investor purchases a long call option at a price of $2.50. The strike price is $35. If the current stock price is $35.10, what is the break-even point for the investor? a) $32.50 b) $35.00 c) $37.50 d) $37.60 e) None of the above 21) A put option on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________. a) $33 / $3.50 b) $3.50 / $33 c) $35 / $3.50 d) $35 / $35 e) $32 / $35 22) A covered call strategy benefits from what environment? a) Sizeable increases in the underlying price b) Price stability c) Price volatility d) Unexpected events e) Declining stock prices 23) __________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed. a) Selling an uncovered call option b) Selling an uncovered put option c) Buying a call option d) Selling a put option e) All of the above are no-risk transactions Use the following information for questions 24 through 30 You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: 24) Suppose you establish a bullish money spread with the 45 and 55 put options. At the expiration date of the options, the stock's price turns out to be $52. Ignoring commissions, the net profit (per share) on your position is _______________. a) $5.00 b) $7.00 c) $8.00 d) $2.50 e) $3.50 25) What is the maximum gain (per share) on the position constructed in question 24? a) $3.50 b) $4.50 c) $5.50 d) $6.50 e) None of the above 26) What is the maximum loss (per share) on the position constructed in question 24? a) $3.50 b) $4.50 c) $5.50 d) $6.50 e) None of the above 27) Now, imagine that you establish a bullish money spread using the 45 and 55 calls. At the expiration date of the options, the stock’s price turns out to be $52. Ignoring commissions, the net profit (per share) on your position is ___________. a) $0.00 b) $0.50 c) $1.25 d) $6.50 e) $8.50 28) What is the maximum gain (per share) on the position constructed in question 27? a) $3.50 b) $4.50 c) $5.50 d) $6.50 e) None of the above 29) What is the maximum loss (per share) on the position constructed in question 27? a) $3.50 b) $4.50 c) $5.50 d) $6.50 e) None of the above 30) What is the breakeven point (in terms of the expiration price of the underlying) of the position constructed in question 27? a) $53.50 b) $47.00 c) $53.00 d) $51.50 e) $52.50 Problems 31) (10 points) Suppose you have the following 4 option contracts that expire in exactly 1 year from today. Premium Strike Price Call 1 $9.89 $75 Call 2 $4.98 $85 Put 1 $3.41 $75 Put 2 $8.30 $85 You establish an option position combining the purchase of Call 1 and Put 2 and the simultaneous sale of Call 2 and Put 1. a) What is the cost of establishing this position? b) Complete the following table, calculating the payoffs of the 4 options, the net cost of the position, and the profit of the overall combination. Stock Price $65 $70 $75 $80 $85 $90 $95 Payoff Long Call 1 Payoff Short Call 2 Payoff Long Put 2 Payoff Short Put 1 Terminal Value Net Premium Paid Profit c) What must be the risk-free rate of return given what you found in part (b)? 32) (15 points) Suppose that you have