1. Bondss investors can avoid risk that interest rates will rise and drive bond prices down by:a. Buying zero coupon bondsb. Buying treasury bondsc. Holding bonds over the yeard. Holding bonds till maturity

2. Which of the following is considered to have the biggest impact on bond yields?a. Economic growthb. Business cyclesc. Inflationd. Federal reserve action

3. The term structure of interest rates is also known as the:a. Yield to maturityb. Probability distributionc. Yield differentiald. 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 bondsb. Invest more now in long term bonds rather than short term bondsc. Invest more now in treasury bonds rather than in corporate bondsd. 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 theoryb. Liquidity preference theoryc. Market segmentation theoryd. None of the above

6. Since the 1930, the yield curve most likely to be seen has been the:a. Upward sloping yield curveb. Downward sloping yield curvec. Flat yield curved. Skewed yield curve

7. The preferred habitat theory is most similar to the:a. Expectations theoryb. Liquidity preference theoryc. Market segmentation theoryd. 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 securitiesb. Liquidity preference theory organizes that interest rate expectations are uncertainc. Liquidity preference theory only deals in long-term securitiesd. 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 futureb. Interest rates to rise in the futurec. Interest rates to fall in the futured. Interest rates to become negative in the future

10. Yields spreads tend to .. during recessions and .. during times of economic prosperity.a. Narrow . Widenb. Widen .. narrowc. Stay constant .. widend. Widen .. stay constant

11. Whisc of the followings is not a pasisive bond strategy?a. An intimization strategyb. A bond swap strategyc. A buy and hold strategyd. 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 holdb. Horizon analysisc. Duration conceptd. Indexing

13. A portfolio is said to be immunized if:a. The present value of the cash flows equals the principlalb. The duration of the portfolio is equal to thr termc. The present value of the cash flowsis greater than the principald. 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. Options eliminate leverageb. Options are a smaller investments than a stock investmentsc. Options allow investor to trade on the overall market movementsd. Option can reduce risk

15. An options that allows the investor to buy stock under the specified conditions is called a:a. Callb. Putc. Derivatived. Future

16. An adoption that allows the investor to sell stock under specified conditions is called a:a. Callb. Putc. Derivatived. Future

17. The exercise price on an option is also known as the:a. Premiumb. Strike pricec. Theoretical valued. Spot price

18. Which of the following statements is true regarding American and European options?a. American options can be exercised only at expirationb. American options can be exercised only in the last week prior to expirationc. European options can be exercised only at expirationd. 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 upwardb. The call writer expects the stock to remain the same or move downc. The call writer expects the stock to splitd. 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 callb. Write a callc. Buy a putd. Write a put

21. A writer of a call can terminate that particular contract anytime before its expiration by:a. Writing a second callb. Buying a putc. Buying a comparable calld. Writing a put

22. A call option written against stock owned by the writer is said to be:a. Nakedb. In the moneyc. Out of the moneyd. Covered

23. The writer of naked call faces:a. An unlimited potential gainb. A specified potential lossc. No chance of loss because this is a conservative strategyd. A limited gain

24. To provide insurance against declining prices on previously purchased stock, an investore could:a. Buy a callb. Write a putc. Buy a stock index optiond. Buy a put

25. The _____ is NOT a determinant of the value of a call option in the Black-Sholes model?a. Interest rateb. Exercise price of the stockc. Price of the underlying stockd. 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. Nakedb. Out of moneyc. In the moneyd. Covered27. Option price usually:a. Increase with maturityb. Are less than intrinsic valuesc. Decrease with a stocks volatilityd. All of the above

28. A (an) ____ seeks to earn a return without asumming risk by contructing riskless hedges.a. Speculatorb. Call writerc. Put eriterd. Arbitrageur

29. Which of the following astatements is FALSE?a. An in-the-money call occurs if the stock price exceeds the exercise priceb. An out-of-the money call occurs if the stock price is less than the exercise pricec. If a call is out of the money, the intrinsic value is zerod. 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 $0b. $0 $5c. $3 $2d. $2 $3

31. In the Black-Sholes model,a. All of the inputs except two are observableb. All of the inputs except one are observablec. The greater the stock price, the lower the price of the call optiond. 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 offerb. Investors can write index optionsc. If exercised the holder of an index option receives the strike priced. 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 callsb. Buy stock index putsc. Write stock index callsd. Write stock index plus

34. On the other side of every futures transaction is:a. The dealerb. The future exchangec. The commodity producerd. The clearinghouse

35. In the case of a futures contract, buyers can settle their positions:a. Only by taking deliveryb. Only by arranging an offsetting contractc. Either by delivery or offsetd. By a combination of delivery and offset

36. The typical method of settling a futures contract is by:a. Arbitrageb. Deliveryc. Offsetd. hedging

37. when trading futures, margin:a. is seldom usedb. indicates that credit is being extendedc. is a down paymentd. in effect, is a performance bond

38. which of the following is a characteristic of futures contracts? Theya. are marked to the market dailyb. can be sold short only on an uptickc. are handled by specialists on futures exchangesd. have no daily price limits

39. the initial margin required for futures tradinga. is only put up by the sellerb. is only put up by the buyerc. van be put up by either party, whoever initiates the transactiond. 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. Longb. Durationc. Shortd. maturity

41. the difference between the cash price and the future price on the same asset or commodity is known as thea. basisb. spreadc. yield spreadd. premium

42. speculations in the futures marketsa. make the market more volatileb. contribute liquidity to the marketc. engage mainly in short salesd. serve no real economics function

43. one difference between a hedger and a speculator is that the hedgera. may have either a profit or a lossb. may not close out his position by taking an opposite positionc. does not have to put up margind. faces a risk without the futures contract