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1.

Bondss investors can avoid risk that interest rates will rise and drive bond
prices down by:
a. Buying zero coupon bonds
b. Buying treasury bonds
c. Holding bonds over the year
d. Holding bonds till maturity
2. Which of the following is considered to have the biggest impact on bond
yields?
a. Economic growth
b. Business cycles
c. Inflation
d. Federal reserve action

3. The term structure of interest rates is also known as the:


a. Yield to maturity
b. Probability distribution
c. Yield differential
d. Yield curve
4. 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 short term bonds
c. Invest more now in treasury bonds rather than in corporate bonds
d. Invest miore now in corporate bonds rather than in treasury bonds

5. Which of the following yield curve theories expect investors to stay in one
maturity segment, regardless of opportunities in other maturity segments?
a. Expectations theory
b. Liquidity preference theory
c. Market segmentation theory
d. None of the above
6. Since
a.
b.
c.
d.

the 1930, the yield curve most likely to be seen has been the:
Upward sloping yield curve
Downward sloping yield curve
Flat yield curve
Skewed yield curve

7. The preferred habitat theory is most similar to the:


a. Expectations theory
b. Liquidity preference theory

c. Market segmentation theory


d. Peeking order theory
8. The major difference between the liquidity preference theory and the
expectations theory is that the:
a. Liquidity preference theory only deals in short-term securities
b. Liquidity preference theory organizes that interest rate expectations
are uncertain
c. Liquidity preference theory only deals in long-term securities
d. Liquidity preference theory assumes investors are risk averse and the
expectations theory does not
9. According to the expectations theory, an upward sloping curve indicates that
incestors expect:
a. Interest rates to become more volatile in the future
b. Interest rates to rise in the future
c. Interest rates to fall in the future
d. Interest rates to become negative in the future
10.Yields 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
11.Whisc of the followings is not a pasisive bond strategy?
a. An intimization strategy
b. A bond swap strategy
c. A buy and hold strategy
d. An indexing strategy
12.A bond strategy attempting to immunize the portfolio from interest rate risk
is based on the concept of:
a. Buy and hold
b. Horizon analysis
c. Duration concept
d. Indexing

13.A portfolio is said to be immunized if:


a. The present value of the cash flows equals the principlal
b. The duration of the portfolio is equal to thr term
c. The present value of the cash flowsis greater than the principal
d. The duration of the portfolio is equal to the investment horizon
14. Which of the following is not a reason for investors to participate in options?

a.
b.
c.
d.

Options eliminate leverage


Options are a smaller investments than a stock investments
Options allow investor to trade on the overall market movements
Option can reduce risk

15.An options that allows the investor to buy stock under the specified
conditions is called a:
a. Call
b. Put
c. Derivative
d. Future
16.An adoption that allows the investor to sell stock under specified conditions is
called a:
a. Call
b. Put
c. Derivative
d. Future
17.The exercise price on an option is also known as the:
a. Premium
b. Strike price
c. Theoretical value
d. Spot price
18.Which of the following statements is true regarding American and European
options?
a. American options can be exercised only at expiration
b. American options can be exercised only in the last week prior to
expiration
c. European options can be exercised only at expiration
d. European options can be exercised any time prior to expiration
19.Which of the following statements is true regarding a call writer:
a. The call writer expects the stock to move upward
b. The call writer expects the stock to remain the same or move down
c. The call writer expects the stock to split
d. The call writer expects the to sell stock prior to expiration of the option
20.To hedge a short sale, an investor could:
a. Buy a call
b. Write a call
c. Buy a put
d. Write a put
21.A writer of a call can terminate that particular contract anytime before its
expiration by:
a. Writing a second call
b. Buying a put

c. Buying a comparable call


d. Writing a put
22.A call
a.
b.
c.
d.

option written against stock owned by the writer is said to be:


Naked
In the money
Out of the money
Covered

23.The writer of naked call faces:


a. An unlimited potential gain
b. A specified potential loss
c. No chance of loss because this is a conservative strategy
d. A limited gain
24.To provide insurance against declining prices on previously purchased stock,
an investore could:
a. Buy a call
b. Write a put
c. Buy a stock index option
d. Buy a put
25.The _____ is NOT a determinant of the value of a call option in the BlackSholes model?
a. Interest rate
b. Exercise price of the stock
c. Price of the underlying stock
d. Expected beta of the underlying stock
26.If the price of the common stock exceeds the exercise price of a call for the
holder, the call is said to be:
a. Naked
b. Out of money
c. In the money
d. Covered
27.Option price usually:
a. Increase with maturity
b. Are less than intrinsic values
c. Decrease with a stocks volatility
d. All of the above
28.A (an) ____ seeks to earn a return without asumming risk by contructing
riskless hedges.
a. Speculator
b. Call writer
c. Put eriter
d. Arbitrageur
29.Which of the following astatements is FALSE?

a. An in-the-money call occurs if the stock price exceeds the exercise


price
b. An out-of-the money call occurs if the stock price is less than the
exercise price
c. If a call is out of the money, the intrinsic value is zero
d. If a call is in the mone, the intrinsic value is zero
30.A stock is at $68. A two-month put (strike price = $70) is available at a $5
premium. The intrinsic value is ____ and the time value is ____
a. $5 $0
b. $0 $5
c. $3 $2
d. $2 $3
31.In the
a.
b.
c.
d.

Black-Sholes model,
All of the inputs except two are observable
All of the inputs except one are observable
The greater the stock price, the lower the price of the call option
There is an inverse relationship between the value of a call and interest
rates in the market

32.Concerning index options, which of the following statements is FALSE?


a. Index options appeal to speculators due to the leverage they offer
b. Investors can write index options
c. If exercised the holder of an index option receives the strike price
d. Index options are settled in cash

33.The best way to protect a stock portfolio in a bear market is to:


a. Buy stock index calls
b. Buy stock index puts
c. Write stock index calls
d. Write stock index plus
34.On the other side of every futures transaction is:
a. The dealer
b. The future exchange
c. The commodity producer
d. The clearinghouse
35.In the
a.
b.
c.
d.

case of a futures contract, buyers can settle their positions:


Only by taking delivery
Only by arranging an offsetting contract
Either by delivery or offset
By a combination of delivery and offset

36.The typical method of settling a futures contract is by:

a.
b.
c.
d.

Arbitrage
Delivery
Offset
hedging

37.when
a.
b.
c.
d.

trading futures, margin:


is seldom used
indicates that credit is being extended
is a down payment
in effect, is a performance bond

38.which
a.
b.
c.
d.

of the following is a characteristic of futures contracts? They


are marked to the market daily
can be sold short only on an uptick
are handled by specialists on futures exchanges
have no daily price limits

39.the initial margin required for futures trading


a. is only put up by the seller
b. is only put up by the buyer
c. van be put up by either party, whoever initiates the transaction
d. must put up by both the buyer and the seller
40.to protect the value of a bond portfolio against a rise in interest rate using
futures, the portfolio owner could execute a ______ hedge.
a. Long
b. Duration
c. Short
d. maturity
41.the difference between the cash price and the future price on the same asset
or commodity is known as the
a. basis
b. spread
c. yield spread
d. premium
42.speculations in the futures markets
a. make the market more volatile
b. contribute liquidity to the market
c. engage mainly in short sales
d. serve no real economics function
43.one difference between a hedger and a speculator is that the hedger
a. may have either a profit or a loss
b. may not close out his position by taking an opposite position
c. does not have to put up margin
d. faces a risk without the futures contract