Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

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20 QUESTIONS AND PROBLEMS

11.The three U.S. commercial rating companies that rate an

issuer’s ______________ are ______________ Investors

Service, ______________ Corporation, and

______________ Ratings. A(n) ______________ indicates a

low credit risk which further translates into a good chance

of future payments. The highest-grade bonds are those

rated ______________. Bond issues assigned a rating in the

top four categories are ______________-grade bonds and

issues rated below the top four categories are

______________-grade bonds, or ______________-yield

bonds or ______________ bonds.

12.Bonds can have option provisions or a(n) ______________

option that gives the ______________ and/or the

______________ an option to take some action against the

other party. The most common type of option in a bond

issue is a(n) ______________ provision. This provision

gives the right to ______________ the debt, either in full or

only in part, before the maturity date. An issue may include

a(n) ______________ provision allowing the bondholder to

change the bond’s maturity. It allows the bondholder the

right to ______________ the issue back to the issuer at par

value on certain dates. A(n) ______________ bond gives

the right to exchange the bond for common stock.

13.Two major theories used to explain the observed shapes of

the ______________ curve are the ______________ theory

(which includes the ______________ expectations theory,

the ______________ theory, and the ______________ the-

ory) and the market ______________ theory.

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Financial Institutions and the Cost of Money 21

SHORT ANSWER QUESTIONS

Refer to Chapter 3, pages 49–80 in Financial Management

and Analysis.

1. Explain the function of ﬁnancial intermediaries.

2. Describe the different types and purposes of the different

deposit institutions.

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22 QUESTIONS AND PROBLEMS

3. How do nondeposit financial institutions manage their

financial assets?

4. What are the components of the interest rate and the fac-

tors affecting these components?

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Financial Institutions and the Cost of Money 23

5. What is the relationship between Treasury spot rates and

forward rates? Why are forward rates also called hedge-

able rates?

6. What is the purpose of the term structure of interest rates?

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CHAPTER

Introduction to Derivatives

FILL IN THE BLANKS

Refer to Chapter 4, pages 83–104 in Financial Management

and Analysis.

1. A(n) ______________ contract requires a participant to

either ______________ or ______________ something,

also known as the ______________, at a speciﬁed future

date at a set price. The future price agreed upon is the

______________ price. The speciﬁed date on which the

transaction occurs is the ______________ date.

2. The basic ______________ function of futures markets is

to offer prospects to ______________ against the

______________ of price movements. ______________

contracts are formed by ______________ and involve tra-

ditional ______________ commodities, imported food-

stuffs, and ______________ commodities. Instruments-

based futures contracts are classiﬁed as ______________

index futures, ______________ rate futures, and

______________ futures.

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26 QUESTIONS AND PROBLEMS

3. ______________ are associated with futures and provide

several functions such as ______________ that two parties

will carry out a preagreed transaction. ______________

risk is the risk that the other party will default on their

obligation on the ______________ date. Due to the use of

a clearinghouse, worry is removed from the parties to a(n)

______________ contract.

4. In a futures contract, the investor must ______________ a(n)

______________ dollar amount per contract that the exchange

dictates. Called the ______________ margin, it is required as

deposit for the contract. The ______________ of the futures

contract ______________ and the investor’s ______________

changes. Recording the ______________ value of a position is

called ______________ a position to ______________ or sim-

ply ______________ to ______________.

5. When investors assume market positions by ______________

a futures contract, the investor is in a(n) ______________

position. On the other hand, if the investor’s opening

position is the ______________ of a futures contract, the

investor is in a(n) ______________ position. A futures

contract’s ______________ will recognize a(n)

______________ if the futures price ______________; the

futures contract’s ______________ will recognize a(n)

______________ if the futures price ______________.

6. The ______________ of the option grants the

______________ of the option the right to purchase from

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Introduction to Derivatives 27

or ______________ to the writer an asset at a specified

______________ within a specified ______________ of

time. The option price is also called the option

______________. The price at which the asset is

______________ is the strike price. The date after which

an option is void is called the ______________ date.

7. Options exercised at ______________ time up to and

including the ______________ date are a(n)

______________ option. Options exercised only at the

______________ date are ______________ options. An

option that can be exercised ______________ the expira-

tion date but only on ______________ dates is called a(n)

______________ option.

8. The option price is a reflection of the option’s

______________ value. Any amount over intrinsic value is

referred to as the ______________ premium. The intrinsic

value of an option is the ______________ value of the

option if it is ______________ immediately.

9. In a(n) ______________ the counterparties agree to

exchange ______________ payments. The ______________

amount of the payments exchanged is based on the

______________ amount. ______________ typically used

by ______________ companies are ______________ rate

swaps, ______________ swaps, and ______________ swaps.

A swap has the ______________ and ______________ pro-

file of a package of ______________ contracts.

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28 QUESTIONS AND PROBLEMS

10.A(n) ______________ is an agreement whereby the

______________ agrees to pay the ______________ when

a designated reference ______________ a predetermined

level. A(n) ______________ is an agreement whereby the

______________ agrees to pay the ______________ when

a designated reference is ______________ than a prede-

termined level. The designated reference could be a spe-

cific ______________ rate or a(n) ______________ price.

A(n) ______________ is equivalent to a package of

______________ options; a(n) ______________ is equiva-

lent to a package of ______________ options.

SHORT ANSWER QUESTIONS

Refer to Chapter 4, pages 83–104 in Financial Management

and Analysis.

1. What are derivatives instruments and why are they useful?

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Introduction to Derivatives 29

2. How are futures liquidated?

3. What are the differences between futures contracts and

forward contracts?

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