Chapter 3: Overview of Security Types

1. Which one of the following is the best definition of a money market instrument? A. corporate debt that matures in 90 days or less B. bank savings account C. investment issued by a financial institution that matures in 30 days or less D. investment issued by a financial institution that matures in one year or less E. debt issued by the government or a corporation that matures in one year or less See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #1 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Money Market Instruments 2. A fixed-income security is defined as: A. a debt obligation that pays a fixed rate of return for a one-year period of time. B. common or preferred stock that pays a fixed annual dividend. C. a long-term debt obligation that pays scheduled fixed payments. D. long-term debt issued solely by a federal or state government. E. any security originally issued as either debt or equity that pays a fixed, preset payment. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #2 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Fixed-Income Securities 3. The annual interest payment divided by the current price of a bond is called the: A. coupon rate. B. current yield. C. yield-to-maturity. D. yield-to-market. E. market yield. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #3 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Current Yield 4. A security originally sold by a business or government to raise money is called a(n): A. derivative. B. primary asset. C. primary debt. D. futures contract. E. option contract. See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #4 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Primary Asset 5. A financial asset that represents a claim on another financial asset is classified as a _____ asset. A. secondary B. optioned C. contracted D. derivative E. primary See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #5 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Derivative Asset 6. A futures contract is an agreement: A. that obligates a corporation to issue additional securities at a specified date in the future. B. to exchange financial assets on a specified date in the future with the price determined on that date. C. to deliver goods today in exchange for an agreed upon payment to be paid on a specified date in the future. D. to exchange a specified quantity of goods on a specified date in the future at the current market price. E. to exchange goods on a specified date in the future at a price that is agreed upon today. See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #6 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 7. An agreement that grants the owner the right, but not the obligation, to buy or sell a specific asset at a specified price during a specified time period is called a(n) _____ contract. A. futures B. obligatory C. quoted D. fixed E. option See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #7 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 8. A call option is an agreement that: A. obligates both the buyer and seller to a future transaction. B. grants the seller the right to buy a security at a predetermined price. C. gives the buyer the right to purchase an asset at some point in the future. D. grants the seller the right, but not the obligation, to sell an asset. E. presets a price but not a time period. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #8 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Call Option 9. A contract that grants its buyer the right, but not the obligation, to sell an asset at a specified price is called a: A. futures contract. B. call option. C. preset contract. D. put option. E. primary contract. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #9 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Put Option 10. The price paid to purchase an option contract is called the: A. strike price. B. option premium. C. exercise price. D. future premium. E. current yield. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #10 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Premium 11. The amount of money per share that will be received when a put option on stock is exercised is called the _____ price. A. market B. stock C. strike D. future E. obligated See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #11 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Strike Price 12. Riverside Metals recently issued some debt that had an original maturity of nine months. This debt is best classified as a(n): A. option contract. B. money market instrument. C. fixed-income security. D. derivative security. E. futures contract. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #12 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Money Market Instruments 13. Money market instruments: A. tend to be illiquid. B. are generally sold in small denominations. C. cannot be resold. D. may be sold on a discount basis. E. are quoted in terms of a spread. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #13 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Money Market Instruments 14. Money market instruments issued by a corporation: A. are default-free. B. are less liquid than those issued by the government. C. must be held by the original purchaser until maturity. D. can only be resold to the original issuer. E. are risk-free. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #14 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Money Market Instruments 15. Which one of the following is classified as a fixed-income security? A. U.S. Treasury bill B. 6-month municipal bond C. common stock that pays regular quarterly dividends D. 2-year U.S. Treasury security E. 9-month bank certificate of deposit See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #15 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Fixed-Income Securities 16. Which one of the following sentences is correct concerning fixed-income securities? A. The coupon rate on a fixed-income security is equal to the current yield. B. The price of a fixed-income security is inversely related to the current yield. C. Fixed-income securities are default free. D. Fixed-income securities tend to be more liquid than money market securities. E. Fixed-income securities include all debt instruments issued by the U.S. government. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #16 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Fixed-Income Securities 17. Assume a semi-annual coupon bond matures in 3 years, has a face value of $1,000, a current market price of $989, and a 5 percent coupon. Which one of the following statements is correct concerning this bond? A. The current coupon rate is greater than 5 percent. B. The bond is a money market instrument. C. The bond will pay less annual interest now than when it was originally issued. D. The current yield exceeds the coupon rate. E. The bond will pay semi-annual payments of $50 each. See Section 3.2 Blooms: Comprehension Jordan - Chapter 03 #17 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Coupon Rate and Current Yield 18. Bond trades are reported: A. on a weekly basis only. B. only when originally sold. C. on TRACE. D. by the SEC. E. only on government issues. See Section 3.2 Blooms: Knowledge Jordan - Chapter 03 #18 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Bond Reporting Use the following bond quotes to answer this question: Jordan - Chapter 03 19. The Beta Movers' bonds pay an annual interest payment equal to 7.12 percent of: A. $999.90. B. $1,000.00. C. $1,000.13. D. $1,033.54. E. $1,034.07. See Section 3.2. Annual interest = coupon rate X Par value ($1,000) Blooms: Comprehension Jordan - Chapter 03 #19 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Bond Quotes Use the following bond quotes to answer this question: Jordan - Chapter 03 20. What was yesterday's closing price on the Alpha Industrial bond? A. $993.86 B. $993.94 C. $994.02 D. $994.10 E. $998.31 See Section 3.2 Blooms: Comprehension Jordan - Chapter 03 #20 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Bond Quotes Use the following bond quotes to answer this question: Jordan - Chapter 03 21. What is the current price of a $1,000 face value Beta Movers' bond? A. $1,000.10 B. $1,000.13 C. $1,033.54 D. $1,033.64 E. $1,034.17 See Section 3.2. Bond prices are quoted as a % of par. Blooms: Comprehension Jordan - Chapter 03 #21 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Bond Quotes 22. Which one of the following represents a residual ownership interest in the issuer? A. U.S. Treasury bond B. corporate bond C. municipal bond D. preferred stock E. common stock See Section 3.3 Blooms: Knowledge Jordan - Chapter 03 #22 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Common Stock 23. Which one of the following statements related to common stock is correct? A. Corporations are required to pay annual dividends to its common stockholders. B. Corporations have the right to discontinue paying dividends. C. Corporations pay dividends at the discretion of the firm's president. D. Common stock is a form of corporate debt. E. Common stock has a pre-defined liquidation value. See Section 3.3 Blooms: Knowledge Jordan - Chapter 03 #23 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Common Stock 24. Preferred stock: A. represents the residual ownership of a corporation. B. is generally issued only by new firms that are small in size. C. has a fixed maturity date similar to a bond. D. dividends can be skipped at the discretion of the company president. E. may or may not be cumulative. See Section 3.3 Blooms: Knowledge Jordan - Chapter 03 #24 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Preferred Stock 25. Preferred stock: A. is a type of corporate debt. B. is treated like debt for tax purposes. C. is listed in the liabilities section of a balance sheet. D. has a stated dividend but no stated liquidation value. E. is treated like equity for both tax and accounting purposes. See Section 3.3 Blooms: Knowledge Jordan - Chapter 03 #25 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Preferred Stock Use the following stock quotes to answer this question: Jordan - Chapter 03 26. How many whole shares of Ditch Digger stock traded today? A. 11,298 B. 112,980 C. 11,298,006 D. 112,980,060 E. 1,129,800,600 See Section 3.3 Blooms: Comprehension Jordan - Chapter 03 #26 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 27. What is today's closing price per share of Buy Rite stock? A. $82.13 B. $101.13 C. $821.30 D. $1,011.30 E. $1,049.00 See Section 3.3 Blooms: Comprehension Jordan - Chapter 03 #27 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote 28. Which one of the following is a derivative asset? A. common stock B. option contract C. government bond D. preferred stock E. corporate bond See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #28 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Derivatives 29. Great Lakes Farm agreed this morning to sell General Mills 25,000 bushels of wheat six months from now at a price per bushel of $9.75. This is an example of a: A. call option. B. put option. C. futures contract. D. money market security. E. fixed-income security. See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #29 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 30. Uptown Jewelers purchased a futures contract on 200 ounces of gold to be exchanged 3-months from now. As the contract holder, Uptown Jewelers: A. has the right, but not the obligation, to purchase 200 ounces of gold 3 months from now. B. has the obligation to purchase 200 ounces of gold at the market price three months from now. C. has an obligation to buy 200 ounces of gold but only if the price of gold increases within the next 3 months. D. is expecting the price of gold to decrease and thus is locking in a selling price. E. will profit if the price of gold is higher three months from now. See Section 3.4 Blooms: Comprehension Jordan - Chapter 03 #30 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 31. Futures contracts: A. require payment in full at the time the contract is written. B. can be resold. C. establish the quantity to be exchanged but not the date of the exchange. D. establish both the quantity to be exchanged and the exchange date but not the price. E. are primary financial assets. See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #31 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 32. At the time a futures contract is written: A. the underlying asset is specifically identified. B. the buyer pays a good faith deposit to the seller. C. the current market price of the underlying asset becomes the contract price. D. the current market price of the underlying asset must be less than the agreed upon futures price. E. the buyer is granted the right, but not the obligation, to exercise the contract. See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #32 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 33. Which of the following are generally included in a standardized futures contract? I. delivery date II. quantity to be delivered III. specific item to be delivered IV. delivery location A. I and II only B. I, II, and III only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #33 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 34. Harvest Fields sold ten September futures contracts on oats. Harvest Fields will: A. pay for the oats in September. B. take delivery of the oats in September. C. pay for the oats now and take delivery in September. D. receive payment now and deliver in September. E. both receive payment and deliver in September. See Section 3.4 Blooms: Comprehension Jordan - Chapter 03 #34 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract 35. Investing in a futures contract: A. guarantees a sale but not a sale price. B. can be profitable for both the buyer and the seller simultaneously. C. guarantees the buyer a profit on the contract. D. creates a gain for one party without causing a loss for the other party. E. can be offset by taking an opposing position. See Section 3.4 Blooms: Knowledge Jordan - Chapter 03 #35 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Contract Use the following wheat futures quotes to answer this question. Jordan - Chapter 03 36. By how much did today's settlement price per bushel for the May 08 wheat futures contract increase over the prior day's settlement price? A. $0.2920 B. $0.2925 C. $29.20 D. $29.25 E. $29.50 See Section 3.4. $11.095 - $10.8025 = $0.2925 Blooms: Comprehension Jordan - Chapter 03 #36 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote Use the following wheat futures quotes to answer this question. Jordan - Chapter 03 37. What are the lowest and highest prices per bushel at which the March 08 wheat futures contract sold today? A. $10.9320; $10.9340 B. $10.9325; $10.9350 C. $10.6300; $10.9320 D. $10.6300; $10.9340 E. $10.6300; $10.9350 See Section 3.4. 1093'4 = $10.935; 1093'2 = $10.9325 Blooms: Comprehension Jordan - Chapter 03 #37 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote Use the following wheat futures quotes to answer this question. Jordan - Chapter 03 38. What price would you have paid today per bushel for the May 08 wheat futures contract if you bought the contract at the final price of the day? A. $10.8020 B. $10.8025 C. $11.0940 D. $11.0950 E. $11.0960 See Section 3.4. 1109'4 = $11.095 Blooms: Comprehension Jordan - Chapter 03 #38 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote 39. If you want the right, but not the obligation, to buy a stock at a specified price you should: A. buy a call. B. sell a call. C. buy a put. D. sell a put. E. either sell a call or buy a put. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #39 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 40. If you want the right, but not the obligation, to sell a stock at a specified price you should: A. buy a call. B. sell a call. C. buy a put. D. sell a put. E. either sell a call or buy a put. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #40 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 41. If you are willing to buy a stock and you wish to receive the option premium you should: A. buy a call. B. sell a call. C. buy a put. D. sell a put. E. either sell a call or buy a put. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #41 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 42. If you are willing to sell a stock and wish to receive the option premium you should: A. buy a call. B. sell a call. C. buy a put. D. sell a put. E. either sell a call or buy a put. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #42 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 43. A European put option grants the holder the right to: A. buy the underlying security at a stated price at any time up to and including the expiration date. B. sell the underlying security at the strike price on or before the expiration date. C. sell the underlying asset at the strike price only on the expiration date. D. buy the underlying asset at or below the exercise price on or before the expiration date. E. buy the underlying asset at the exercise price on the expiration date. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #43 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 44. An American call option grants the holder the right to: A. sell the underlying security at the strike price on or before the expiration date. B. sell the underlying asset at the strike price only on the expiration date. C. buy the underlying asset at or below the exercise price on or before the expiration date. D. buy the underlying asset at the exercise price only on the expiration date. E. buy the underlying security at a stated price on or before the expiration date. See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #44 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 45. When a put option is exercised, the: A. seller of the option receives the strike price. B. seller of the option receives the option premium. C. buyer of the option sells the underlying asset and receives the option premium. D. buyer of the option pays the option premium and receives the underlying asset. E. seller of the option must buy the underlying asset and pay the strike price. See Section 3.5 Blooms: Comprehension Jordan - Chapter 03 #45 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 46. You will earn a profit as the owner of a call option if the price of the underlying asset: A. decreases. B. remains constant or decreases. C. remains constant. D. remains constant or increases. E. increases. See Section 3.5 Blooms: Comprehension Jordan - Chapter 03 #46 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 47. The seller of a naked call is betting that the price of the underlying asset will: A. decrease. B. increase. C. decrease and then increase prior to the expiration date. D. will remain constant for a period of time and then increase prior to the expiration date. E. have no effect on the value of the call. See Section 3.5 Blooms: Comprehension Jordan - Chapter 03 #47 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract 48. Options expire on the _____ of the expiration month. A. last trading day B. 3rd Friday C. last Friday D. Saturday following the 3rd Friday E. Saturday following the last Friday See Section 3.5 Blooms: Knowledge Jordan - Chapter 03 #48 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract Use these option quotes to answer this question: Jordan - Chapter 03 49. The price you will pay (per underlying share) to buy the 50 call option on JL stock is: A. $4.75. B. $4.80. C. $5.00. D. $5.90. E. $6.00. See Section 3.5. To buy an option you pay the Ask price. Blooms: Comprehension Jordan - Chapter 03 #49 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes Use these option quotes to answer this question: Jordan - Chapter 03 50. What price will you receive (per underlying share) if you sell the 47.50 call option on JL stock? A. $4.80 B. $5.00 C. $5.90 D. $6.00 E. $6.10 See Section 3.5. When you sell an option you receive the bid. Blooms: Comprehension Jordan - Chapter 03 #50 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes Use these option quotes to answer this question: Jordan - Chapter 03 51. What was the prior day's closing price on the 50 call option on JL stock? A. $4.45 B. $4.75 C. $5.05 D. $5.10 E. $5.30 See Section 3.5 Blooms: Comprehension Jordan - Chapter 03 #51 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes 52. You own eight (8) 7.25 percent coupon bonds with a total maturity value of $8,000. How much will you receive every six months as an interest payment? A. $213.50 B. $290.00 C. $427.00 D. $540.00 E. $843.75 Semi-annual interest = 8 x [(.0725 × $1,000)/2] = $290 Blooms: Application Jordan - Chapter 03 #52 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Coupon Payment 53. A 7.5 percent coupon bond is currently quoted at 89.3 and has a face value of $1,000. What is the amount of each semi-annual coupon payment if you own three (3) of these bonds? A. $56.25 B. $75.00 C. $100.46 D. $112.50 E. $200.93 Semi-annual interest = 3 x [(.075 × $1,000)/2] = $112.50 Blooms: Application Jordan - Chapter 03 #53 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Coupon Payment 54. A $1,000 face value bond has a 7.85 percent semi-annual coupon and sells for $982.50. What is the current yield? A. 7.75 percent B. 7.82 percent C. 7.89 percent D. 7.99 percent E. 7.61 percent Current yield = (.0785 × $1,000)/$982.50 = 7.99 percent Blooms: Application Jordan - Chapter 03 #54 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Current Yield 55. A 7 percent coupon bond has a face value of $1,000 and pays interest annually. The current yield is 6.8 percent. What is the current price of this bond? A. $971.43 B. $978.41 C. $1,068.00 D. $1,029.41 E. $1,104.00 Bond price = (.07 × $1,000)/.068 = $1,029.41 Blooms: Application Jordan - Chapter 03 #55 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Current Yield Use the following bond quotes to answer this question: Jordan - Chapter 03 56. The Talliru Company bond pays interest semi-annually. You own five of these bonds. What is the amount you will receive as your next interest payment? A. $76.00 B. $228.00 C. $190.00 D. $456.00 E. $256.00 Next interest payment = 5 × [(.076 × $1,000)/2] = $190 Blooms: Application Jordan - Chapter 03 #56 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Bond Quotes Use the following bond quotes to answer this question: Jordan - Chapter 03 57. If you purchase five Zeus bonds, the cost will be _____ and the annual interest income will be _____. A. $5,000.00; $388.75 B. $5,000.00; $412.50 C. $5,000.00; $460.00 D. $5,101.50; $412.50 E. $5,101.50; $460.00 Cost = 5 × (1.0203 × $1,000) = $5,101.50 Annual interest income = 5 × (.0825 × $1,000) = $412.50 Blooms: Application Jordan - Chapter 03 #57 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Bond Quotes Use the following stock quotes to answer this question: Jordan - Chapter 03 58. What is the current yield on Cloverdale stock? A. 3.35 percent B. 3.60 percent C. 1.55 percent D. 6.25 percent E. 7.20 percent Current yield = $0.72/$21.48 = 3.35 percent Blooms: Application Jordan - Chapter 03 #58 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 59. Josh owns 200 shares of Chelsea stock. What is the current value of his shares? A. $6,605 B. $8,820 C. $9,640 D. $9,850 E. $10,920 Value = 200 × $48.20 = $9,640 Blooms: Application Jordan - Chapter 03 #59 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 60. Aldridge, Inc. pays an annual dividend of $1.22. What is the dividend yield on this stock? A. 2.09 percent B. 3.54 percent C. 4.60 percent D. 7.20 percent E. 8.04 percent Dividend yield = $1.22/$34.50 = 3.54 percent Blooms: Application Jordan - Chapter 03 #60 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 61. Baker Company has 136,000 shares of stock outstanding and a PE ratio of 18. What was the net income for the most recent four quarters? A. $590,089 B. $678,003 C. $727,972 D. $1,306,900 E. $1,405,800 Net income = ($78.10/18) × 136,000 = $590,089 Blooms: Application Jordan - Chapter 03 #61 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 62. What was the previous day's closing price for Baker Co. stock? A. $74.70 B. $75.80 C. $76.20 D. $78.10 E. $80.40 Previous day's closing price = $78.10 + $2.30 = $80.40 Blooms: Application Jordan - Chapter 03 #62 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 63. Vivian purchased 700 shares of Aldridge, Inc. stock at what turns out to be the lowest price during the past year. How much has the value of her shares changed since she made this investment? A. -$4,970 B. $60 C. $1,950 D. $420 E. $5,390 Change in value = 700 × ($34.50 - $33.90) = $420 Blooms: Application Jordan - Chapter 03 #63 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 64. What is the latest earnings per share for Chelsea Industries stock if the PE is 22? A. $1.06 B. $1.10 C. $2.19 D. $2.37 E. $4.10 EPS = $48.20/22 = $2.19 Blooms: Application Jordan - Chapter 03 #64 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following stock quotes to answer this question: Jordan - Chapter 03 65. A pension fund purchased 25 round lots of Baker Company stock at the closing price of the day yesterday. What was the cost of that purchase? A. $7,810 B. $8,040 C. $201,000 D. $241,200 E. $256,800 Cost of purchase = 25 × 100 × ($78.10 + $2.30) = $201,000 Blooms: Application Jordan - Chapter 03 #65 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.3 Topic: Stock Quote Use the following soybean futures quotes to answer this question: Jordan - Chapter 03 66. Last week, you purchased three November 08 soybean futures contracts when the price quote was 1302΄6. What is your current profit or loss on this investment? A. -$3,150.00 B. -$2,625.00 C. -$30.00 D. $987.50 E. $3,750.00 Net loss = 3 × 5,000 × ($12.8525 - $13.0275) = -$2,625 Blooms: Application Jordan - Chapter 03 #66 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote Use the following soybean futures quotes to answer this question: Jordan - Chapter 03 67. Julie was lucky enough to purchase two September 08 futures contracts on soybeans when the contracts were at the lowest price of the day. What is Julie's total profit or loss as of the end of the day? A. $25.00 B. $50.00 C. $60.00 D. $250.00 E. $260.00 Net profit = 2 × 5,000 × ($13.14 - $13.135) = $50 Blooms: Application Jordan - Chapter 03 #67 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote Use the following soybean futures quotes to answer this question: Jordan - Chapter 03 68. What was the total price fluctuation on one September 08 soybeans contract today? A. $1,337.50 B. $1,340.00 C. $1,312.50 D. $1,360.00 E. $1,362.50 Fluctuation = 5,000 × ($13.4075 - $13.1350) = $1,362.50 Blooms: Application Jordan - Chapter 03 #68 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote Use the following soybean futures quotes to answer this question: Jordan - Chapter 03 69. You purchased four November 08 futures contracts on soybeans when they first became available this morning. Your investment has been worth as little as _____ and as much as _____. A. $255,350; $265,500 B. $255,350; $265,020 C. $257,440; $265,500 D. $257,440; $265,020 E. $257,440; $265,520 Lowest value to date = 4 × 5,000 × $12.7675 = $255,350 Highest value to date = 4 × 5,000 × $13.275 = $265,500 Blooms: Application Jordan - Chapter 03 #69 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Quote 70. You purchased four August 09 futures contracts on soybeans at a price quote of 1156′6. Each contract is for 5,000 bushels with the price quoted in cents and 1/8 ths of a cent per bushel. Assume the contract price is 1161′4 when you close out your contract six weeks from now. What will be your total profit or loss on this investment? A. $950 B. -$238 C. $6,480 D. $16,200 E. $24,000 Net profit = 4 × 5,000 × ($11.615 - $11.5675) = $950 Blooms: Application Jordan - Chapter 03 #70 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Profit 71. You own one futures contract on gold that you purchased at a quoted price of 948.4. The current price quote is 1008.8. The contract size is 100 ounces and the quotes are expressed in dollars and cents per ounce. What is your current profit or loss on this investment? A. $30.40 B. $912.00 C. $3,040.00 D. $6,040.00 E. $9,120.00 Net profit = 100 × ($1,008.80 - $948.40) = $6,040 Blooms: Application Jordan - Chapter 03 #71 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Profit 72. You would like to lock in the selling price on 55,000 bushels of wheat, which you plan to harvest and deliver to the market in September. The September futures price quote is currently 912΄6. If you write September futures contracts on your wheat, you will be guaranteed a total price of _____ for your crop. Each contract is quoted in cents and 1/8 ths of a cent per bushel with a contract size of 5,000 bushels. A. $45,637.50 B. $502,012.50 C. $11,908.75 D. $297,700.50 E. $2,977,000.25 Total value = 55,000 × $9.1275 = $502,012.50 Blooms: Application Jordan - Chapter 03 #72 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.4 Topic: Futures Profit Use these option quotes to answer this question: Jordan - Chapter 03 73. You would like to have the right to purchase 200 shares of ZZ Industries stock at a price of $32.50 a share. How much will it cost you to buy options to meet this objective? A. $103.11 B. $12.90 C. $374.00 D. $430.00 E. $561.00 Option premium = 200 × $1.87= $374 Blooms: Application Jordan - Chapter 03 #73 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes Use these option quotes to answer this question: Jordan - Chapter 03 74. You own 500 shares of ZZ Industries stock which you purchased for $28.60 a share. You would like to have the right to sell your shares for $30 a share. What will be the cost to obtain this right? A. $0.40 B. $0.90 C. $5.00 D. $396.00 E. $900.00 Option premium = 500 × $.01 = $5 Blooms: Application Jordan - Chapter 03 #74 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes 75. The 47.50 put on a stock is trading at 1.32 bid and 1.37 ask. To buy one option contract, you must pay _____ at the time the contract is purchased. A. $1.32 B. $132.00 C. $137.00 D. $4,613.00 E. $4,882.00 Option premium = 100 × $1.37 = $137 Blooms: Application Jordan - Chapter 03 #75 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Contract Use these option quotes to answer this question: Jordan - Chapter 03 76. You want to sell three call option contracts on ZZ Industries stock at a strike price of $30 a share. How much will you receive in option premiums if you place this order today? A. $300 B. $1,290 C. $1,320 D. $561 E. $546 Option premium = 300 × $4.30 = $1,290 Blooms: Application Jordan - Chapter 03 #76 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes Use these option quotes to answer this question: Jordan - Chapter 03 77. You want the right, but not the obligation, to sell 600 shares of ZZ Industries stock at a price of $35 a share. How much will it cost you to establish this option position? A. $422 B. $408 C. $360 D. $378 E. $382 Option premium = 600 × $0.68 = $408 Blooms: Application Jordan - Chapter 03 #77 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Option Quotes 78. You purchased five call option contracts with a strike price of $40 and an option premium of $1.35. You closed your contract on the expiration date when the stock was selling for $42.50 a share. What is your total profit or loss on your option position? A. -$50 B. -$10 C. $135 D. $385 E. $575 Total profit = 500 × [($42.50 - $40) - $1.35] = $575 Blooms: Application Jordan - Chapter 03 #78 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Call Option 79. You purchased three call option contracts with a strike price of $22.50 and an option premium of $0.45. You held the option until the expiration date. On the expiration date, the stock was selling for $21.70 a share. What is the total profit or loss on your option position? A. -$45 B. $0 C. -$240 D. -$120 E. -$135 Total loss = 300 × -$0.45 = -$135 Blooms: Application Jordan - Chapter 03 #79 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Call Option 80. You bought twelve call option contracts with a strike price of $27.50 and a premium of $0.77. At expiration, the stock was selling for $26.90 a share. What is the total profit or loss on your option position if you did not exercise it prior to the expiration date? A. -$9.24 B. -$10.20 C. $0 D. -$924 E. -$1,020 Total loss = 1,200 × -$0.77 = -$924 Blooms: Application Jordan - Chapter 03 #80 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Call Option 81. You bought five call option contracts with a strike price of $47.50 and an option premium of $1.20. At expiration, the stock was selling for $51.30 a share and you exercised your option. What is your total cost basis in the acquired shares? A. $23,150 B. $25,050 C. $23,750 D. $24,350 E. $26,250 Total cost = 500 × ($1.20 + $47.50) = $24,350 Blooms: Application Jordan - Chapter 03 #81 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Core Section: 3.5 Topic: Call Option 82. You purchased two call option contracts with a strike price of $22.50 and a premium of $2.80. At expiration, the stock was selling for $28.10 a share. What is the total amount it cost you to acquire your shares? A. $5,620 B. $5,060 C. $4,980 D. $3,860 E. $4,400 Total cost = 200 × ($2.80 + $22.50) = $5,060 Blooms: Application Jordan - Chapter 03 #82 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Call Option 83. You purchased six put option contracts with a strike price of $45 and a premium of $1.10. What is the total net amount you will receive for your shares if you exercise this contract when the underlying stock is selling for $42.90 a share? A. $23,660 B. $24,700 C. $25,740 D. $26,340 E. $26,400 Total net amount = 600 × ($45 - $1.10) = $26,340 Blooms: Application Jordan - Chapter 03 #83 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Put Option 84. You purchased seven put option contracts with a strike price of $25 and a premium of $0.85. At expiration, the stock was selling for $24.80 a share. What is the total net amount you received for your shares, assuming that you disposed of your shares on the expiration date? A. $17,955 B. $16,905 C. $17,045 D. $17,815 E. $17,160 Net total amount = 700 × ($25 - $0.85) = $16,905 Blooms: Application Jordan - Chapter 03 #84 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Put Option 85. You bought a put option contract with a strike price of $37.50 and a premium of $1.80. At expiration, the stock was selling for $35 a share. What is the net total amount you received for your shares assuming that you disposed of your shares on the expiration date? A. $3,680 B. $3,930 C. $3,570 D. $3,330 E. $3,320 Total net amount = 100 × ($37.50 - $1.80) = $3,570 Blooms: Application Jordan - Chapter 03 #85 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Put Option 86. You purchased 500 shares of SLG, Inc. stock at a price of $40.20 a share. You then purchased put options on your shares with a strike price of $47.50 and an option premium of $1.90. At expiration, the stock was selling for $48.30 a share. You sold your shares on the option expiration date. What is your net profit or loss your transactions related to SLG, Inc. stock? A. $2,650 B. $2,250 C. $3,100 D. $3,550 E. $3,700 Net profit = 500 × ($48.30 - $40.20 - $1.90) = $3,100 Blooms: Application Jordan - Chapter 03 #86 Learning Objective: 03-04 Option contracts. Level of Difficulty: Intermediate Section: 3.5 Topic: Put Option 87. You own 300 shares of stock which you would like to have the right to sell at $40 a share. The 40 call option is quoted at $0.35 bid, $0.40 ask. The 40 put is quoted at $0.45 bid, $0.50 ask. How much will it cost you to obtain the right to sell all of your shares at $40 a share? A. $135 B. $50 C. $150 D. $105 E. $75 Put option premium = 300 × $.50 = $150 Blooms: Application Jordan - Chapter 03 #87 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Options 88. Alicia owns 600 shares of Danube stock. She thinks the market price will continue to rise but would like to ensure that she can get at least $47.50 a share should she decide to sell her shares. The 47.50 call option is quoted at $1.15 bid, $1.20 ask. The 47.50 put is quoted at $0.90 bid, $0.95 ask. How much will it cost her to ensure that she can sell all of her shares for at least $47.50 each? A. $805 B. $840 C. $570 D. $630 E. $690 Put premium = 600 × $.95 = $570 Blooms: Application Jordan - Chapter 03 #88 Learning Objective: 03-04 Option contracts. Level of Difficulty: Core Section: 3.5 Topic: Options 89. What are the basic differences between a T-Bill and a T-Bond? Which security(ies) are considered risk-free? Answer will vary Feedback: T-Bills are money market securities that mature in less than one year and are sold on a discount basis. T-Bills are considered to be risk-free. T-bonds are coupon bonds that pay interest semiannually and are quoted on a percentage of face value basis. T-bonds are fixed-income securities as they are initially issued for periods greater than one year. T-bonds are not considered risk-free due to the longer maturities. Blooms: Comprehension Jordan - Chapter 03 #89 Learning Objective: 03-01 Various types of interest-bearing assets. Level of Difficulty: Core Section: 3.2 Topic: Treasury Securities 90. Preferred stock is sometimes considered to be a cross between debt and equity. Describe the characteristics of preferred stock that make it similar to debt as well as the characteristics that make it similar to equity. Answer will vary Feedback: Preferred stock has a fixed payment and a fixed liquidation value, which makes it similar to a debt instrument. However, unlike interest on debt, the board of directors is not legally bound to pay preferred dividends. In addition, preferred stock does not have a maturity date, which then classifies it as an equity security. Blooms: Comprehension Jordan - Chapter 03 #90 Learning Objective: 03-02 Equity securities. Level of Difficulty: Core Section: 3.2 Topic: Preferred Stock 91. Farmer Mac raises wheat. He expects his yield this summer to be 320,000 bushels but he decides to sell futures contracts on only 230,000 bushels. What is his logic for selling futures and why didn't he sell futures on his entire crop? Answer will vary Feedback: Farmer Mac has no way of knowing with certainty whether the market price at harvest time will be greater than, equal to, or less than the price he can lock in now by selling futures. Thus, he hedges his bet by committing only a portion of his expected output at this time. He also has no way of knowing with certainty what his actual crop yield will be and therefore does not want to guarantee delivery of 320,000 bushels because he would have to purchase, at the market price, any shortfall in his actual output. Thus, he is taking a middle road and only hedging a portion of his anticipated output. Blooms: Comprehension Jordan - Chapter 03 #91 Learning Objective: 03-03 Futures contracts. Level of Difficulty: Intermediate Section: 3.4 Topic: Futures Contract 92. Explain what a put option is and describe the circumstances under which you would be willing to sell a put. Answer will vary Feedback: A put option is the right, but not the obligation, to sell a security at the strike price. You would be willing to write (sell) a put if you believe the price of the underlying security will increase and you wish to receive the option premium. You would also be willing to write a put if you are willing to purchase the stock at the strike price as the option premium will help offset that cost. Blooms: Comprehension Jordan - Chapter 03 #92 Learning Objective: 03-04 Option contracts. Level of Difficulty: Intermediate Section: 3.5 Topic: Put Option 93. Why would you purchase a call option? What is your maximum profit or loss on such a position? Answer will vary Feedback: Purchasing a call grants you the right, but not the obligation, to buy a security at the strike price. The maximum loss you can incur is equal to the option premium paid. The maximum profit is unlimited as there is no upper limit on the price of the underlying security. Blooms: Comprehension Jordan - Chapter 03 #93 Learning Objective: 03-04 Option contracts. Level of Difficulty: Intermediate Section: 3.5 Topic: Call Option 94. Briefly compare and contrast options and futures. Answer will vary Feedback: · Futures and Options: Both are types of derivative instruments which derive their value from an underlying asset. Both provide the opportunity to act today to affect the price of a future trade. Both options and futures are "zero-sum" games in the sense that what the buyer gains (loses) is exactly mirrored by what the seller loses (gains). Both offer the opportunity to hedge existing positions or to speculate on market movement. Both may be closed out prior to maturity by purchasing the opposite side of the trade. · Futures Contracts: A futures contract is, as the name implies, a contractual obligation made today regarding the specifics of a trade to be completed at a future date. Both parties to a futures contract are obligated to perform. No money exchanges hands between the two parties at the time the contract is entered, though margin deposits are required on both sides. The specifications of exchange-traded futures contracts are designed by the exchange to meet the needs of potential buyers in terms of contracts size, trading months etc. · Option Contracts: An option contract cannot be purchased on margin. The margin premium must be paid in full at purchase. The buyer of an option has the right but not the obligation to perform on or before the option matures. The seller of an option is obligated to perform if the option he sold is exercised. Call options give the buyer the right to buy the underlying asset at the exercise price. A put option gives the buyer or holder the right to sell the underlying asset at the exercise price. Exchange-traded options are standardized in terms of contract size (100 shares), trading months, etc. Blooms: Comprehension Blooms: Knowledge Jordan - Chapter 03 #94 Learning Objective: 03-03 Futures contracts. Learning Objective: 03-04 Option contracts. Level of Difficulty: Intermediate Section: 3.4 Section: 3.5 Topic: Options and Futures ch3 Summary Category # of Questions Blooms: Application 37 Blooms: Comprehension 23 Blooms: Knowledge 35 Jordan - Chapter 03 123 Learning Objective: 03-01 Various types of interest-bearing assets. 20 Learning Objective: 03-02 Equity securities. 15 Learning Objective: 03-03 Futures contracts. 24 Learning Objective: 03-04 Option contracts. 36 Level of Difficulty: Core 89 Level of Difficulty: Intermediate 5 Section: 3.2 21 Section: 3.3 14 Section: 3.4 23 Section: 3.5 37 Topic: Bond Quotes 5 Topic: Bond Reporting 1 Topic: Call Option 7 Topic: Common Stock 2 Topic: Coupon Payment 2 Topic: Coupon Rate and Current Yield 1 Topic: Current Yield 3 Topic: Derivative Asset 1 Topic: Derivatives 1 Topic: Fixed-Income Securities 3 Topic: Futures Contract 9 Topic: Futures Profit 3 Topic: Futures Quote 7 Topic: Money Market Instruments 4 Topic: Option Contract 12 Topic: Option Premium 1 Topic: Option Quotes 7 Topic: Options 2 Topic: Options and Futures 1 Topic: Preferred Stock 3 Topic: Primary Asset 1 Topic: Put Option 6 Topic: Stock Quote 10 Topic: Strike Price 1 Topic: Treasury Securities