1

ACADEMY OF BANK

DEPARTMENT OF FINANCE

SYLLABUS

INVESTMENT ANALYSIS AND PORTFOLIO

MANAGEMENT
INSTRUCTOR: BUI QUANG DAM, MBA, SJU

Bui Quang Dam, MBA at SJU

PREREQUISITE: The Fundamentals of Finance, and Financial Accounting

COURSE DESCRIPTION: Instructor will supply chosen materials to students .
The materials include some chapters of two textbooks, mentioned in the
TEXT, powerpoints, video clips, syllabus . The students must research
textbooks and apply to and compare to Vietnam financial market. Students
are recommended to focus on concepts of fields of financial investment and
market, problems supplied by instructor.
CREDIT:

45 hours

TEXT: Investment Analysis and Portfolio Management ( recommend

chapter 1, 4, 5, 7, 8)
Eighth Edition
Reilly and Brown
Corporate Finance ( recommend chapter 5)
Sixth Edition
Ross, Westerfield, Jaffe.
SOFTWARE: excel and MATLAB
SUPPLEMENTAL MATERIALS: Case studies, Videos in Investment, Articles
METHOD OF INTRUCTION: Class lectures, case studies, discussions and
homework. Class instructions will be supplemented by www.buimba.info.
Students are recommended to read articles and researches.
Note: students must focuses much more in field of stock market.
GRADING SCHEDULE:
Class participation: 10%
Mid-term test: 20%
Final test: 70%
GRADING SYSTEM:
Mid-term: Multi Choice questions
Final exam: Multi Choice questions and Problems
COSRSE SCHEDULE:
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter

1:
2:
3:
4:
5:
6:
7:

Overview of Financial Market and Institutions Class 1 *

Investment Setting class 2
Organization and Functioning of Securities Markets Class 3, 4, 5
Security-Market Indicator Series Class 6
An Introduction to Portfolio Management Class 7
An Introduction to Asset Pricing Models Class 8
Securities Valuation Class 8, 9

*one class approximates 60 minutes

Chapter 1.
1. You have concluded that next year the following relationship are possible:
Economic status
Weak economy
Static economy
Strong economy

Probability
0.15
0.60
0.25

Rate of Return
-5%
5%
15%

What is your expected rate of return E(R) for the next year. Compute the
standard deviation of the rate of return for the one year period. Compute the
coefficient of variation for your portfolio.
Solution: E(R) = 6%, = 6.25%, CV = 1.04
2. Assume that you hold a two stock portfolio. You are provided with the
following information on your holdings.
Stock
Shares
Price(t)
Price (t + 1)
1
15
10
12
2
25
15
16
Calculate the HPY for stock 1 and stock 2. Calculate the market weights for
stock 1 and 2 based on period t values. Calculate the HPY for the portfolio.
Solution: HPR1 = 1.2, HPY1 = 20%, HPR2 = 1.07, HPY2 = 7%; Market weight:
29%, 71%; Portfolio HPY = 10%
3. Based on the following stock price and shares outstanding information,
compute the beginning and ending values for a price-weighted and a
market-value-weighted index
4.
December 31, 2005
December 31, 2006
Price
Shares
Price
Shares
Outstanding
outstanding
Stock A
20
100,000,000
32
100,000,000
Stock B
80
2,000,000
45
4,000,000*
Stock C
40
25,000,000
42
25,000,000
*Stock split two-for-one during the year.
a. Compute the percentage change in the value of each index.
b. Explain the difference in results between the two indexes.
c. Compute the percentage change for an un-weighted index and discuss
why these result differ from those of the other indexes.
Solution: a. 1.401, ////
5. You are considering two assets with the following characteristics.
E(Ri) = 0.15, E(1) = 0.10, w1 = 0.5
E(R2) = 0.20, (1) = 0.20. w2 = 0.5

Compute the mean ah standard deviation of two portfolio if r 1,2 = 0.40 and
-0.60, relatively. Plot the two portfolio on a risk return graph and briefly
explain the results.
Chapter 5.
Companies

Number of
shares
outstanding
2,000
6,000
3,000
4,000

1
2
3
4

Closing prices
Day T

Close prices
Day T + 1

30.00
55.00
22.5
40.00

35.00
50.00
25
42.50

1. Assume that s stock price-weighted indicators considered of the four

issues with their prices. What are the values for the day T and T + 1
and what is the change?
2
Solution: Value T = 36.875, value T + 1 = 38.125, change = 1.25
2. For a value-weighted series, assume that day T is the base period and
the base value 50. What is the new index value for Day T + 1 and how
has the index changed from day T
Solution: 49.80
3. Assume that an investor had $4,000 to invest, compute an unweighted price indicator series. What is the percentage change in
wealth for this portfolio ?
Solution: 6.23%
4. Calculate a price weighted index for January 13 th. What is the divisor at
the beginning of January 14th ? Calculate a price weighted index for
January 14th. Calculate a price weighted index for January 15 th. What is
the divisor at beginning of January 16th?. Calculate a value weighted
index for January 16th if the initial index value is 100.
Stock Price

Jan, 13,2000
Jan, 14,2000
Jan, 15, 2000

X
25
25
27

Y
40
42
42

Z
30
7
8

Jan, 16, 2000

14

44

10

*5: 1 split on stock Z after close on Jan, 13, 2000

** 2: 1 Split on stock X after close on Jan, 15, 2000

Chapter ////
2

Number of
shares
X
Y
Z
1000
2000
1000*
1000
2000
5000
1000* 2000
5000
*
2000
2000
5000

Bui Quang Dam, MBA in NY

1. A treasury security is quoted at 1003-20 and has a par value of

$100,000. Which of the following is its quoted dollar price?
Solution: (103 + 20/32)*100,000 = 103625
2. Consider a floating rate issue that carries a coupon rate that is reset on
July 1 of each year. The coupon rate is defined as the q year London
Inter-bank offered Rate (LIBOR) + 50 basis points and coupons are
paid semiannually. If the 1 year LIBOR is 5.5% on July 1, what will the
semiannual coupon be on this issue?
Solution: (5.5 + 0.5)/2 = 3
3. the current price of a bond is 103.25. If interest rates increase by
0.4%, the value of the bond decreases to 100 if interest rate decrease
by 0.4% the price of the bond increase to 100.5. What is the effective
duration of the bond?
Solution: (105.5 100)/ (2x 103.25x0.04) = 0.6658
4. An investor holds $ 100,000 (par value) with TIPS currently trading at
par. The coupon rate of 3% is paid semiannually, and the annual
inflation rate is 3.5%. What will the investor receive in coupon payment
after the first six months have passed?
Solution: 100,000 x 1.0175 x 0.15 = 1526.25
5. Two bonds have par values of $ 1,000. Bond A is a 6%, 20 year bond
priced to yield 7%; Bond B is a 6.6%, 25 year bond priced to yield 9%.
Using compounding, the prices of these two bonds would be:
Solution: PA = 889.06; PB = 705.32
6. A bond has a par value of $10,000 and a coupon rate 9.5% payable
semi-annually. The bond is currently trading at 110 3/2. What is dollar
amount of the semiannual coupon payment?
Solution: 475
7. Given that a bond has a par value of $10,000 and is currently offered
at a quoted price of 108 7/32, what is the dollar amount that investor
must pay in order to purchase the bond?
Solution: 10,821.88
8. Given a zero-coupon bond that matures three years from today has a
par value of $1,000 and yield to maturity of 7.6% per annum, what is
the current value of the issue?
Solution: PV = 799.49
9. Considering a floating rate issue has a coupon rate that is reset on 1
January of each year. The coupon rate is defined as one-year LIBOR +
100 basic points and coupons are paid semi-annually. If the one-year
LIBOR is 7.5% on January 1st, which of the following is the semi-annual
coupon payment receive by holder of the issue in that year?
Solution: 7.5 + = 4.25%
10.Suppose a Treasury security is quoted 107-27 and has a par value of
$100,000. Which of the following is its quoted price?
Solution: (107 + 27/32)x 100,000 = 107.843.80
11.Suppose that for a TIPS of $ 100,000 par value the coupon rate paid
semi-annually is 2.0% and the annual inflation is 4%. What is the
principal of the bond after six months assuming that is it now trading
at par?

Solution: 100(1+4/2) = 102

12.Suppose for a TIPS of $100,000 par value and currently trading at par,
the coupon rate paid semi-annually is 3% and the annual inflation rate
is 3.5%. What is the coupon payment after six months has passed?
Solution: 1526.25
13.An analyst observes a 8 year, maturity 12% coupon bond with annual
payment. The face amount is $ 1000. He believes that the required
yield for this bond is 13%. What is the present value of the bond?
Solution: 952.01
14.Suppose that you calculate that the modified duration of a bond is
9.27. Estimate the percentage price change in the bond if yields
decrease by 50 points
Solution: (-9.27) (-50) = 4.635%
Multi-choice questions
1. The 4 year spot rate is 8.45%, and the 3 year spot rate is 9.25%. What
is the 1 year forward rate three years from today?
a. 3.400%
b. 6.085%
c. 7.256%
d. 12.059%
Solution: b
Question 2 and 3
Given forward rates in:
Year 1 = 6.5%
Year 2 = 7.85%
Year 3 = 11.78%
Year 4 = 12.47%
2. The value of a 4 year, 8% annual pay, $ 1,000 par value bond would be
closest to:
a. $ 744.55
b. $954.97
c. $1,209.16
d. $1,585.62
Solution: b
3. Using annual compounding, the value of a 3 year, zero coupon, $ 1,000
par value would be:
a. $ 718
b. $779
c. $ 882
d. $ 928
Solution: b
3. Assume you are looking at a bond that has an effective duration 12.5
and a convexity of 63.7. Using both of these measures, find the
estimated percentage change in price for this bond, given that market
yields are expected to decline by 100 basis points
a. 20.95%
b. 17.05%

c. 13.14%
d. 14.18%
Chapter ///
1. Assume that you purchased an 8 percent, 20 year, $ 1,000 par,
semiannual payment bond price at $1,012 when it has 12 years
remaining until maturity. Compute:
a. Its promised yield to maturity
b. B, Its yield to call if the bond is callable in three years with 8 percent
premium.
Solution: a = 7.8374, b = 9.86% , 8.91 ? (instruction: FV = 1080///)
2. Calculate the duration of an 8 percent, $1,000 par bond that matures
in three years if the bonds YTM is 10 percent and interest is paid
semiannually.
a. Calculate this bonds modified duration.
b. Assuming the bonds YTM goes from 10% percent to 9.5%, calculate an
estimate of the price change.
Solution: a = 2,65%; b = increase 1.32%
TEST
1. Considering a floating rate issue that has a coupon rate that is reset on
1 January of each year. The coupon rate id defined as one-year LIBOR
+ 100 basis points and the coupon are paid semi-annually. If the oneyear LIBOR is 7.5% on January 1st, which of the following of the semiannual coupon payment received by the holder of the issue in that
year ?
a. 8.500%
b. b. 3.875%
c. c. 4.250%
d. 7.750%
2. An analyst is considering two bonds: Bond X yield 7.2% and bond Y
yields 6.3%. Using bond Y as the reference bond, the absolute yield
spread and yield ratio respectively are
a. 0.9%; 1.143
b. -0.9%; 1.143
c. 0.9%; 0.875
d. -0.9%; 0.875
Solution: a
3. Which of the following statements is True with regard to a call
provision on a bond?
a. A call provision is an advantage to the bondholder.
b. A call provision will benefit the issuer in times of declining interest
rates.
c. A call provision is a disadvantage to the bondholder in periods of rising
interest rates.
d. An issue with a call provision will trade at a higher price than an
indentical issue with no call provision.
Solution: b

4. Suppose a Treasury security is quoted 107-27 and has a par value of

$100,000. Which of the following is its quoted price?
a. $107,843.75
b. $107,531.25
c. $100,000.00
d. $975,312.50
5. The volatility of a bond depends on:
i. embedded options
ii. coupon
iii. maturity
iv. yield.
a. ii and iii only
b. I, ii, and iii only
c. I, iii and iv only
d. I, ii, iii, and iv
Solution: d
5. What is the convexity measure for a 6% annual pay coupon 20 year
option free selling at 100 to yield 6% using an interest rate shock of
100 basis points?
a. 72.5
b. 93.41
c.105.3
d. 120.7
Solution: a
6. A portfolio manager wants to estimate the interest risk of a bond using
duration. The current price of the bond is 106. A valuation model
employed by the manager found that if interest rates decline by 25
basis points, the price will be increase to 108.5 and interest rates
increase by the same number of basis points, the price will decline to
104. What is the duration of this bond?
a. 8.49
b. 16.98
c. 18.49
d. 19.20
Solution: a
7. A three-year option fee bond with a 6 percent annual rate has a yield
to maturity of 8 percent. One-and two-year spot rates are 5.5 percent
and 6.0 percent, respectively. The three-year spot rate is closet to:
a. 6.4%
b. 8.1%
c. 9.0%
d. 9.2%
Solution: b
8. Municipal bond carries a coupon of 6 3/4 and is trading at par; A fully
taxable corporate security is offering 9 percent, to taxpayer in the 34
percent tax bracket, these bonds would provide a taxable equivalent
yield and after tax yield respectively of:

a. 4.5%; 5.94%
b. 10.2%; 5.94%
c. 4.5%; 7.25%
d. 10.2%; 5.73%
Solution: b
9. ABC Corp. has $200 million, 7% coupon bond that is refund protected
until September, 1 2014. This issue:
a. Currently may be redeemed but only if refunded by an issue
with a lower cost
b. Is call protected until September 1, 2004
c. Is non-callable
d. Currently may be redeemed as long as the funds are not
acquired by reissue of the bond at lower rate.
Solution: a
10.The interest rate risk of a bond normally is
a. Greater for shorter maturities.
b. Lower for longer duration
c. Lower for higher coupons
d. None of the above.
Solution: c
11.Which of the following embedded options in bonds benefit the
borrower?
a. Put option
b. Floor
c. Convertible provision
d. Accelerated sinking fund provision
Solution: a
12.Which of he following applies to an on-the run Treasury issue? An onthe-run issue is:
a. A short-term Treasury security
b. The most recently issued Treasury securities
c. The most widely held Treasury securities
d. A bond that is alive rather than having matured already.
Solution: b
13.Assume the following yields for different bond issues by a corporation.
- One-year rate: 5.50%
- Two-year rate: 6.00%
- Three-year rate: 7.00%
If the on-the-run three year U.S. Treasury is yielding 6 percent, then what
is the absolute yield spread on the three-year corporate issue?
a. 0.40
b. 1.40
c. 100bp
d. 200bp
Solution: c
14.All maturities are exact. You observe a ABC 5 1 /8 percent, 5 year
semiannual coupon bond trading at 107.245 percent of par. The bond
is callable at 104 in 4 years, and is putable at 100 in 3 years. What is
the yield-to-maturities, yield-to-call and yield-to-put respectively?
a. 2.930%; 3.45%; 4.33%

b. 2.920%; 3.531%; 3.854%

c. 3.854%; 2.598%; 4.33%
d. 3.531%; 3.854%; 2.598%
Solution: d
15.The 4 yield spot rate is 5.45 percent, and the 3 year spot rate is 6.25
percent. What is the 1 year forward rate 3 years from today ( assume
annual compounding)?
a. 5.059%
b. 4.850%
c. 3.086%
d. 2.400%
Solution: c
16.A 15-year bond has a $1,000 par value bond, a 4% coupon and a yield
to maturity of 3.3%. Interest is paid annually. The bonds current yield
is
a. 3.697%
b. 4.012%
c. 3.328%
d. 7.334%
17.Suppose that you calculate that the modified duration of a bond is
9.27. Estimate the percentage price change in the bond if yield
decrease by 50 basis points.
a. -4.635%
b. -7.155%
c. + 7.155%
d. +4.635%
Solution: d
18.Duration would be lowest for a:
a. 1 year, zero-coupon bond at 7% YTM
b. 1-year, 7% coupon bond at 7% YTM
c. 10-year, 7% coupon bond at 7% YTM
d. 20-year, coupon bond at 6% YTM
Solution: a
19.A U.S. Treasury TIPS securities would be not have:
a. Credit risk.
b. Inflation risk.
c. Call risk.
d. Any of the above
20.Compute the price of a 6%, 3 year bond that pays interest annually,
given the following spot rates:
Year
1
2
3
Spot rate
4%
5%
6%
a. $ 1000,00
b. $1002.10
c. $1010.20
d. $1028.30
Solution: d
21.All other things being equal, which one of the following bonds will have
the greatest volatility?
a. 15-year, 15% coupon bond.

a.
b.
c.
d.

b. 5-year, 10% coupon bond

c. 15 year, 10% coupon bond
d. 5 year, 15% coupon bond
Solution: c
22.General obligation bonds are
a. U.S. Treasury bonds backed by the full faith and credit of the
issuer.
b. U.S. Treasury bonds backed by income generated form specific
projects.
c. Municipal bonds backed by the full faith and credit of the issuer.
d. Municipal bonds backed by income generated from specific
projects.
e. A type of U.S. agency security.
Solution: c
23.Collateralized mortgage obligation are
a. Mortgage pass-through securities.
b. Mortgage pass-through securities with varying maturities.
c. Mortgage pass-through securities with no default risk.
d. Mortgage pass-through securities with variable coupon rates.
e. None of the above.
Solution: b
24.Two bonds have par value of $1,000. Bond A is a 5 percent, 15 year
bond priced to yield 8 percent; Bond B is 7.5 percent, 20-year bond
price to yield 6 percent. Using annual compounding, the prices of these
bonds would be:
Bond A
Bond B
$ 740.61
$ 847.08
740.61
1,172.04
743.22
1,172.04
1,311.39
1,311.39
Solution: c
Test.

I
1.
2.
3.
4.
5.
6.
7.
8.

Please note that each question may have many parts. Answer each part to
get the maximum points.
1. Match the best choice in column II to the word or phrase in column I
(15 points)
II
Investment Banker
a. Maintain orderly market
Efficient market
b. Dealers market
Organized exchange
c. Computer quotation
Registered trader
d. Direct Institutional trade
Specialists
e. 10,000 shares or more
Option market
f. AMEX
OTC
g. Original purchase market
Ask price minus bid
h. Trade for your own account

9. NASDAQ
10. Third market
11. Fourth market
12. Block trades
13. SIPC
14. Primary market

i. Spread
j. underwriting
k. Insures investors account
l. quick price response
m. CBOE
n. OCT trades of NYSE securities

Solution: 1-j, 2-l, 3-f, 4-h, 5-a, 6-m, 7-b, 8-I, 9-c, 10-n, 11-d, 12-e, 13-k, 14-g
2a. Discuss how the individuals investor strategy may change as he or
she goes through the accumulation, consolidation, spending and gifting
phases of life. Draw a labeled diagram (10 points)
2b. Suppose you bay a stock for $37 and one year later you sell it for $45.
You received $2.25 in dividends during the year. Find your HPR and HPY (5
points)
3. Bill had a margin account with an equity balance of $5,000. If initial
margin requirements are 60 percent and Butler Industries is currently
selling at $45 per share: (10 points)
a. How many shares of Butler can Bill purchase?
b. What is Bills profit if Butlers price rises to $65?
c. If the maintenance margin is 40 percent, to what price can Butler
industry fall before Bill receives a margin call.
4a. Define market and briefly discuss the characteristics of a good market.
(5 points)
4b. Define a primary and secondary market for securities and discuss how
they differ. Discuss how the primary market is dependent on the
secondary market. (5 points)
4. The following are the monthly rates of return for the Microsoft and for
General Electric during a four month period. (10 points)
Month
Microsoft
General Electric
1
-0.04
0.07
2
0.06
-0.02
3
-0.07
-0.10
4
0.12
01.5
Compute the following:
a. Expected monthly rate of return for each stock.
b. Standard deviation of return for each stock.
5. You are given the following information regarding prices for a sample
of stocks: (5 points)
Stock
Number of
Price (t)
Price
share
(t+1)
A
1,000
60
80
B
10,000
20
35
C
30,000
18
25
a. Construct a price-weighted series for these three stocks, and compute
the percentage change in the series for the period from t to t + 1.

b. Construct a value-weighted series for these three stocks, and compute

the percentage change in the series for the period from t to t + 1.
Assume the initial value is 100.
c. Construct an equally-weighted series for these three stocks, and
compute the percentage change in the series for the period from t to t
+ 1. Assume the initial index value is 100.
6. Would you expect the required rate of return for the U.S investor in the
U.S common stocks to be the came as the required rate of return on
Japanese stock markets? What factors would determine the required
rate of return for stocks in these countries? (5 points)
7. Briefly explain the concept of the efficient market hypothesis (EMH)
and each of its three forms-weak, semi strong, and strong, and briefly
discuss the degree to which existing empirical evidence supports each
of the three forms of the EMH ( 10 points)
8. If the expected return of Stock A is 10% and Standard deviation is 12%
and expected return of Stock B is 16% and Standard deviation is 18%,
The correlation between them is 0.72. What is portfolio risk and return
if equal amount is invested in the two securities ( 10 points)
1. Assume the Cisco System expects to receive euro 10,000,000 in 90
days. A dealer provides a quote of $0.85 for the currency forward
contract to expire in 90 days. Suppose that at the end of 90 days, the
rate is $ 0.92 assume that settlement is in cash. Calculate the cash
flow at expiration, if Cisco System
Solution: 10,000,000(0.85-0.92) = 700,000
2. Calculate the payoff at expiration for a call option on the S&P 100
stock index in which the underlying price is $600 at expiration, the
multiplier is 100, and the exercise price is a)510; b) 580
Solution: a) 9000, b) 2000
3. Calculate the payoff at expiration for a put option on an interest rate in
which the underlying is a 180-day interest rate at 7.22 percent at
expiration, the notional principal is $10 million, and the exercise price
is 6.5 percent; or 8.2 percent.
Solution: a) 0, b) 4900
4. Estimate the price of a call option, assuming
S = $55; P = $150; X = $50; RFR 6%; 90 days until expiration
Solution: 7.20
5. Consider the following information and calculate the value of put
according the put-call parity.
Call price = $ 8.80
Exercise price = $ 65.00
Time to option expiration = 6 months
Current stock price = $ 71.32
Risk-free rate = 5%
Solution: 0.91
6. Calculate the payoff at expiration for a call option on an interest rate,
in which, the underlying is a 180-day interest rate at 5.27% at
expiration, the notional principal is $ 10 million, and the exercise price
is 5%; or 6.8 %

Solution: a) 13,500; b) 0
7. A US company has entered into in interest rate swap with a dealer in
which the notional principal is $ 10 million. The company will pay a
floating rate of LIBOR and receive a fixed rate of 6.25 percent. Interest
is paid semiannually, and the current LIBOR is 6.00 percent. Calculate
the first payment and indicate which party pays to whom. Assume that
floating rate payment will be made on the basis of 180/360 and fixedrate payments will be made on the basis of 180/356
Derivatives
1. A put on A stock with a strike of $ 35 is priced at $2 per share while a
call with a strike price of $ 35 is priced at $ 3.50. The maximum per
share loss to the writer of an uncovered put ____________and the
maximum per share gain to the writer of an uncovered call ___________
a. $ 33.00 ; $3.50
b. $30.00: 31.50
c. $35.00; $3.50
d. $35.00: $35.00
Solution: a
2. The current level of the S&P 500 is 550. The dividend yield on the S&P
500 is 3%. The risk-free interest rate is 6%. The future price for a
contract on the S&P 500 due to expire 6 months from now should
be_______
a. $541.69
b. $558.31
c. $566.50
d. $583.00
Solution: b
3. You buy a call option and a put option on GE. Both the call option and
the put option have the same exercise price and expiration date. The
strategy is called a _______
a. Horizontal spread
b. Long straddle
c. Short straddle
d. Vertical spread
4. The stock price of GE is $31 today. The risk-free rate of return is 6%
and GE pays no dividends. A put option on GE stock with an exercise
price of $30 and an expiration date six months from now is worth
$2.14 today. A call option on GE stock with an exercise price of $30
and expiration date six months from now should be_______ worth
today.
a. $2.25
b. $3.14
c. $4.00
d. $4.84
5. A future contract________
a. is a contract to be signed in the future by the buyer and the seller of a
commodity

b. is an agreement to buy or sell a specified amount of an asset at a

predetermined price on the expiration date of the contract
c. is an agreement to buy or sell a specified amount of an asset at the
spot price on the expiration date of the contract
d. gives the buyer the right, bit not the obligation, to buy an asset some
time in the future.
Solution: b
6. The future price for a contract on gold due to expire a year from now is
$430. The risk-free interest rate is 8%. The spot price of gold should
be__________
a. $398.15
b. $413.46
c. $447.20
d. $464.40
Solution: a
7. A swap
a. Obligates two counterparties to exchange cash flows at one or more
future dates.
b. Allow participants to restructure their balance sheets
c. Allow a firm to convert outstanding fixed rate debt to floating rate
debt.
d. a and b
e. a, b, and c
Solution: e
8. An interest rate cap is
a. an agreement in which the buyer makes a payment today in exchange
for possible future payment if a reference interest rate exceeds a
specified limit.
b. An agreement in which the buyer makes a payment today in exchange
for possible future payments if a reference interest rate falls below a
specified limit.
c. An agreement in which the CFTC commits to the buyer that it will make
up any marginal payments due if a reference interest rate falls below a
specified limit.
d. An agreement in which the CFTC commits to the buyer that it will make
up any marginal payments due if a reference interest rate exceeds a
specified limit.
e. The maximum allowable rate that can be earned on a swap
agreement.
Solution: a
9. A portfolio insurance strategy can be created if you own the underlying
stock and:
a. A sell a call option on the stock.
b. Buy a call option on the stock.
c. Sell a put option on the stock
d. Buy a put option on the stock.
Solution: d
10.Which of the following statements is false?
a. A forward contract imposes an obligation on both the buyer and the
seller.

b. A call option imposes an obligation on the buyer to buyer the

underlying security.
c. A put option imposes an obligation on the seller to buy the underlying
securities if the put is exercised.
d. Both a put and ca call writer has an obligation to honor the terms of
the option.
Solution: b
11.Which of the following is not true about interest rate swaps?
a. Payments are based on a notional principal.
b. Floating rate payers profits if interest rates fall.
c. Payments can be quarterly as well as semi-annually.
d. Parties exchange debt obligations.
e. Default risk is a possible in the swaps market.
Solution: E