Multiple Choice Questions

1.   A 3-year bond with a yield of 2% has a (Macaulay) duration of 2.5. What will be the percentage change in the price of the bond if the yield increases to 2.2% based on the duration

approximation?

a.    Price will fall 0.50%.

b.    Price will fall 5.00%.

c.    Price will fall 0.49%.

d.    Price will fall 4.90%.

2.    If the forward rate from time 1 to time 2 (f2) exceeds the 1-year, zero-coupon yield (y1), then what

must be true about the yield on a 2-year zero-coupon bond (y2)?

a.   y2  must be greater than f2.

b.   y2  must be greater than y1  but less than f2.

c.    y2  must be less than y1.

d.    Not enough information to tell.

3.    Under the liquidity preference theory (or liquidity preference hypothesis) which of the following statements is false?

a.    If the term structure is downward sloping then short-term rates are definitely expected to fall in the future.

b.    If the term structure is upward sloping then short-term rates are definitely expected to rise in the future.

c.    The long-term rate is greater than the geometric average of expected future short-term rates. d.   The forward rate exceeds the expected future short-term rate.

4.    Holding all else constant, under the Gordon growth model, if the beta of a stock increases what happens to the trailing PE ratio (P0/E0) relative to the forward-looking PE ratio (P0/E1)? Assume  g>0, (1-b)>0, R>g, and the market risk premium is positive.

a.    Both ratios fall by the same amount in absolute terms.

b.    Both ratios fall by the same amount in percentage terms.

c.    Both ratios increase by the same amount in absolute terms.

d.   The trailing ratio falls by less than the forward-looking ratio in absolute terms.

5.    If you bought a stock 2 years ago at a price of $100, received a single dividend of $5 at the end of the 2 years and sold the stock for $102, what is the annual HPR over the 2-year holding period?

a.    2.47%

b.    3.44%

c.    3.50%

d.   7.00%

6. Which statement is not true regarding the market portfolio?

A. It includes all publicly traded financial assets.

B. It lies on the efficient frontier.

C. All securities in the market portfolio are held in proportion to their market values.

D. It is the tangency point between the capital market line and the indifference curve.

E. it lies on a line that represents the expected risk-return relationship.

7. 1-year European calls and puts on a non-dividend paying stock with an exercise price equal to 100 (X=100) trade at prices of $15 and $5, respectively (C=15, P=5). If the risk-free rate is 0%, what is the  stock price?

A. 100

B. 110

C. 120

D. Not enough information to tell,

8. According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to:

A. the call value plus the present value of the exercise price plus the stock price.

B. the call value plus the present value of the exercise price minus the stock price.

C. the present value of the stock price minus the exercise price minus the call price.

D. the present value of the stock price plus the exercise price minus the call price.

E. None of these is correct.

9. A protective put strategy is

A. a long put plus a long position in the underlying asset.

B. a long put plus a long call on the same underlying asset.

C. a long call plus a short put on the same underlying asset.

D. a long put plus a short call on the same underlying asset.

E. None of these is correct.

10. Which of the following factors affect the price of a stock option

A. the risk-free rate.

B. the riskiness of the stock.

C. the time to expiration.

D. the expected rate of return on the stock.

E. the risk-free rate, the riskiness of the stock, and the time to expiration

11. Delta is defined as

A. the change in the value of an option for a dollar change in the price of the underlying asset. B. the change in the value of the underlying asset for a dollar change in the call price.

C. the percentage change in the value of an option for a one percent change in the value of the underlying asset.

D. the change in the volatility of the underlying stock price.

E. None of these is correct.

12. Higher dividend payout policies have a                        impact on the value of the call and a   impact on the value of the put compared to lower dividend payout policies.

A. negative, negative

B. positive, positive

C. positive, negative

D. negative, positive

E. zero, zero

13. If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be                  .

A. 0.60

B. 0.40

C. -0.60

D. -0.40

E. -.17

14. Use the Black-Scholes Option Pricing Model for the following problem. Given: SO= $70; X = $70; T = 70 days; r = 0.06 annually (0.0001648 daily);  = 0.020506 (daily). No dividends will be paid before

option expires. The value of the call option is                  .

A. $10.16

B. $5.16

C. $0.00

D. $2.16

E. None of these is correct

15. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is                          .

A. 8.65%

B. 8.45%

C. 7.95%

D. 8.36%

E. None of these is correct.

16. What should the purchase price of a 3-year zero coupon bond be if it is purchased today and has face value of $1,000?

A. $887.42

B. $871.12

C. $879.54

D. $856.02

E. $866.32

17. The curvature of the price-yield curve for a given bond is referred to as the bond's

A. modified duration.

B. immunization.

C. sensitivity.

D. convexity.

E. tangency.

18. Which of the following two bonds is more price sensitive to changes in interest rates?

1) A par value bond, A, with a 12-year-to-maturity and a 12% coupon rate.

2) A zero-coupon bond, B, with a 12-year-to-maturity and a 12% yield-to-maturity.

A. Bond A because of the higher yield to maturity.

B. Bond A because of the longer time to maturity.

C. Bond B because of the longer duration.

D. Both have the same sensitivity because both have the same yield to maturity.

E. None of these is correct.

19. Which of the following are false about the interest-rate sensitivity of bonds?

I) Bond prices and yields are inversely related.

II) Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short- term bonds.

III) Interest-rate risk is directly related to the bond's coupon rate.

IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

A. I

B. III

C. I, II, and IV

D. II, III, and IV

E. I, II, III, and IV

20. Which of the following bonds has the longest duration?

A. A 15-year maturity, 0% coupon bond.

B. A 15-year maturity, 9% coupon bond.

C. A 20-year maturity, 9% coupon bond.

D. A 20-year maturity, 0% coupon bond.

E. Cannot tell from the information given.

Question 23

Apple’s stock volatility (standard deviation) is 30%. The covariance between Apple and the market is 0.05. The volatility of the market (standard deviation) is 20%.

a)What is Apple’s idiosyncratic (non-systematic) stock volatility? (8 pts)

b)   What percentage of Apple’s total volatility can be diversified away? (4 pts)

Question 24

Two investors are comparing performance. One averaged a 19% rate of return and the other a 16% rate of return. However, the beta of the first investor was 1.5, whereas that of the second was 1.

a)    If the T-bill rate were 6% and the market return during the period were 14%, which investor would be the superior stock selector? (6 pts) (Hint: Alpha)

b)   What if the T-Bill rate were 3% and the market return were 15%, which investor would be the superior stock selector? (6 pts)

Question 25

The spot rates of interest for five Treasury Securities are shown below. Assume all securities pay interest annually:

Term to Maturity            Spot Rate of Interest

1 year                                                13%

2                                                         12%

3                                                         11%

4                                                         10%

5                                                          9%

a)   Compute the 2-year implied forward rate for a deferred loan beginning in 3 years (6 pts)