erants her a right that she may or may s0 increases in value as the value of the
ID: 2619138 • Letter: E
Question
erants her a right that she may or may s0 increases in value as the value of the asset underlying may or may not decide to exercise. her contract declines. 6) Sue has a contract that a This right Which one of theo to create this situation? A) Purchased a put option B) Sold a put option C) Entered a swap contract D) Sold a call option E) Purchased a call option 7) An investor buys a The investor's bond T-bill at a bank discount quote of 4.80 with 150 days to maturity. equivalent yield on this investment is _ D) 5.74% A) 4.97% B) 5.47% C) 4.8% 8) 8) A 5.5% 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield ot A) 8.20%. C) 10.75%. D) 4.82%. B) 11.40%, 9) The risk-free rate is 7%. Theexpected market rate of return is 15%, if you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A) buy the stock because it is underpriced B) sell the stock short because it is underpriced. C) buy the stock because it is overpriced. D) sell short the stock because it is overpriced. E) None of the options, as the stock is fairly priced 10) Rational risk-averse investors will always prefer portfolios A) that are risk-free to all other asset choices B) located on the efficient frontier to those located on the capital market line C) at or near the minimum-variance point on the efficient frontier D) located on the capital market line to those located on the efficient frontier II) were designed to concentrate the credit risk of a bundle of loans on one class 11) of investor, leaving the other investors in the pool relatively protected from that risk. A) Bonds B) Collateralized debt obligations C) Derivatives D) Stocks E) All of the options 12) Over the past year you earned a nominal rate of interest of 8% on your money. The 12 inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was A) 10.0% B) 4.8%. C)15.5%. D) 15.0%. E) 3.8%.Explanation / Answer
6.
In Put option When Value of underlying assets decline then value of put option increases and chance of excercise the option increases. Here, she will excercise the option when underlying assets value decline, so she must have purchased Put option.
Option (A) is correct answer.
8.
Yield on Municiple bond = 7.20%
Tax rate = 33%
Equivalent taxable yield = 7.20% / (1- 33%)
= 10.75%
Equivalent taxable yield is 10.75%.
9.
Required rate of return = Risk free rate + (market return - Risk free rate) × Beta
= 7% + (15% - 7%) × 1.30
= 7% + (8% × 1.30)
= 7% + 10.40%
= 17.40%
Required rate of return is 17.40% and expected return is 12%.
Since, required rate of return is more than expected return. so bond is overvalued, so investor should Sell the stock.
Option (D) is correct answer.
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