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Chapter 2

Consider the following three stocks:

S to c k P ric e N u m b e r o f s h a re s o u ts ta n d in g
S to c k A $40 200
S to c k B $70 500
S to c k C $10 600

16.The price-weighted index constructed with the three stocks is

A) 30
B) 40
C) 50
D) 60
E) 70

Answer: B Difficulty: Easy

Rationale: ($40 + $70 + $10)/3 = $40.

1.Which of the following is not a characteristic of a money market instrument?

A) liquidity
B) marketability
C) long maturity
D) liquidity premium
E) C and D

Answer: E Difficulty: Easy

Rationale: Money market instruments are short-term instruments with high liquidity and
marketability; they do not have long maturities nor pay liquidity premiums.

4.The bid price of a T-bill in the secondary market is

A) the price at which the dealer in T-bills is willing to sell the bill.
B) the price at which the dealer in T-bills is willing to buy the bill.
C) greater than the asked price of the T-bill.
D) the price at which the investor can buy the T-bill.
E) never quoted in the financial press.

Answer: B Difficulty: Easy

Rationale: T-bills are sold in the secondary market via dealers; the bid price quoted in the
financial press is the price at which the dealer is willing to buy the bill.

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37.In order for you to be indifferent between the after tax returns on a corporate bond paying 8.5%
and a tax-exempt municipal bond paying 6.12%, what would your tax bracket need to be?
A) 33%
B) 72%
C) 15%
D) 28%
E) Cannot tell from the information given

Answer: D Difficulty: Moderate

Rationale: .0612 = .085(1-t); (1-t) = 0.72; t = .28

55. A put option allows the holder to

A) buy the underlying asset at the striking price on or before the expiration date.
B) sell the underlying asset at the striking price on or before the expiration date.
C) sell the option in the open market prior to expiration.
D) B and C.
E) A and C.

Answer: D Difficulty: Easy

Rationale: A put option allows the buyer to sell the underlying asset at the striking price on
or before the expiration date; the option contract also may be sold prior to expiration.

53. With regard to a futures contract, the short position is held by

A) the trader who bought the contract at the largest discount.
B) the trader who has to travel the farthest distance to deliver the commodity.
C) the trader who plans to hold the contract open for the lengthiest time period.
D) the trader who commits to purchasing the commodity on the delivery date.
E) the trader who commits to delivering the commodity on the delivery date.

Answer: E Difficulty: Easy

Chapter 1
Market makers in OTC market have given following ask quotations on ABC bonds: 1051:03;
1052:04; 1050:05. Which of them is priority price to investors?
A) 1051:03;
B) 1052:04;
C) 1050:05
D) all of them

5. An example of a derivative security is ______.

A) a common share of General Motors

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B) a call option on common share of General Motors;

C) a commodity futures contract
D) B and C
E) A and B

Answer: D Difficulty: Easy

Rationale: The values of B and C are derived from that of an underlying financial asset; the
value of A is based on the value of the firm only.
14. __________ are an indirect way U. S. investor can invest in foreign companies.
A) ADRs
B) IRAs
C) SDRs
D) GNMAs
E) Krugerrands

Answer: A Difficulty: Easy

Rationale: Only ADRs represent an indirect investment in a foreign company.

17. Firms that specialize in helping companies raise capital by selling securities are called
________.
A) commercial banks
B) investment banks
C) savings banks
D) credit unions
E) all of the above.

Answer: B Difficulty: Easy

Rationale: An important role of investment banks is to act as middlemen in helping firms

place new issues in the market.

46. The market for new automobiles is best described as

A) a primary, brokered market.
B) a primary, dealer market.
C) a primary direct search market.
D) a secondary auction market.
E) a secondary negotiable market.

Answer: B Difficulty: Moderate

Rationale: New cars sell in a primary market, used ones in a secondary market. New autos
typically sell through dealers, who maintain their own inventory of the cars and earn a profit

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from selling them.

28. The organized exchanges are examples of ________.

A) auction markets
B) continuous markets
C) secondary markets
D) A and B
E) A, B, and C

Answer: E Difficulty: Easy

Rationale: The organized exchanges have all of the above characteristics. See page 20.

21. The over-the-counter securities market is an example of ________.

A) an auction market
B) a brokered market
C) a dealer market
D) a direct search market
E) none of the above

Answer: C Difficulty: Easy

Rationale: The over-the-counter market consists of dealers who own the securities and bring
buyer and seller together, profiting from the spread.

Market makers in OTC market have given following bid quotations on ABC bonds: 1031:31;
1032:04; 1031:25. Which of them is priority price to shareholder-sellers?
A) 1031:31;
B) 1032:04;
C) 1031:25;
D) all of them

52. [8 points] Discuss the differences between spot and futures markets.

Difficulty: Moderate

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15. [10 points] Discuss the advantages and disadvantages of futures ownership vs options ownership

20 If you buy 100 shares of IBM common stock at market price ($75) and at the same time sell 100
call options (strike price - $75) on IBM common stock on market price $5:

a. [8 points] What is the most money you can make over the next year?

$5*100=$500

b. [8 points] If you pay $75 per share, what is the most money you could lose over the year?

$(75-5)*100=7000

21 On April 1, you bought 5000 shares of a stock for $35 a share and a year later you sold it for $40
a share. During the year, you received a cash dividend of $2 a share.
a. [5 points] Compute your HPR.

HPR=(40-35+2)/35=0,2=20%

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b. [6 points] If you borrow 60% of isvestment value from broker and APR of your (see 21.a)
deal was 42,86%, at what price you have sold shares in this case..

HPR=(X-35+2)/17,5=42,86%
answer - $40,5

22. [9 points] On March 1, you bought 300 shares of a stock for $33 a share. Then, after 2 mounths
you sold 100 shares for $35. Then, you sold other shares, when you received margin call, in
corresponding (margin call) price. Initial margin was 60%, minimal – 40%. Compute your HPR
during for this five mounth period.

300*33=9900; 60% - 5940; 40%-3960; 100*35= 3500; gayidvit miviget=3500-100*33*40%

=3500-1320 dagvrcha 2180

D=3960-1320=2640. – es axali sesxi, anu rac darca 200-is mimart. tumca sesxi ar shecvlila

(200*p-2640)/200*P=0.4; 0,6=2640/200p; P=2640/200*0,6=$22 – margin call

gavyidet: 200*22=4400; 4400-2640=1760 –ostalos;

HPR=(1760+2180-5940)/5940=2000/5940= -33,67%

23. 91-days maturity T-Bills market-maker’s bid is 5,36% and ask price is 5,18%. T-bills par value
is 10000$.

a) [7 points] What price can you sell this T-Bills on secondary market?

{1-(5,36*91/360/100)}*10000=(1- 0,0135)*10000= 9864,51

b) [7 points] What price can you buy this T-Bills on secondary market?

{1-(5,18*91/360/100)}*10000=(1-0,0130938)*10000=9869,06

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24. Assume, investor has purchased 91-day T-Bills with par value 10000$ at price 9850$.

a) [4 points] What is his profit?

10000-9850=150

b) [5 points] What is HPR?

HPR=150/9850=1,52%

c) [7 points] What is APR

1,52%*360/91=6,01%

d) [7 points] What is bank discount rate (rBD)?

rBD=150/10000*(360/91)= 5,93%

e) [8 points] What is bonds equivalent yield (rBEY)?

150/9850*365/91= 0,060242=6,02%

f) [8 points] What is EAR (assume 365/91=4)

9850*(1,0152)365/91=9850*1,0622

EAR=6,22

25. Broker A have sold 20 November futures contracts in soybean to Broker B on April. After that,
Broker B sell 20 same contacts to Broker C. One contract provide for delivery 20 tonne soybean.
Initial margin is 5%. Yesterday quotation is $2520 per tonne.

25a. [2 points] Which brokers have open short, or open long positions?

A – open short, C-open long

25b. [3 points] What about broker B’s position?

B- closed his position

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25c. [4 points] What margin amount participants deposited before trade?

5%*20 tonne*20 contracts*2520= 50 400$

26. The price quotations of Treasury bonds in the Wall Street Journal show an ask price of 106:16
and a bid price of 105:08. T-bonds par value is 1000$.
a) [7 points] As a seller of the bond what is the dollar price you expect to recieve on
secondary market?

sell: {105:06=105 8/32=105,25% from 1000$ = 1052,50

b) [7 points] As a buyer of the bond what is the dollar price you expect to pay on secondary
market?

buy: {105:16=105 16/32=105,5% from 1000$ = 1055,00

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