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Finance
Q:
Briefly explain how the imputation tax system works in Australia using an example.
Q:
Briefly explain how the shareholders are taxed twice in the U.S.A. using an example.
Q:
A bank that buys a call option:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
Q:
A financial institution that buys a put option:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
Q:
Briefly describe the "imputation tax system."
Q:
Briefly explain how shareholders' returns are taxed twice in the United States?
Q:
A bank that goes short in the futures market:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
Q:
Briefly describe the middle-of-the-roaders' position. .
Q:
A financial institution that goes long in the futures market:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
Q:
Briefly explain how current tax laws favor capital gains?
Q:
Suppose a Eurodollar time deposit futures contract has a duration of .5 years and has a current market price of $950,000. Market interest rates are 8.5 percent and are expected to fall to 7.5 percent. What is the change in this futures contract's market price from this change in interest rates?
A) $4378
B) -$4378
C) $30,645
D) -$30,645
E) None of the above
Q:
Briefly describe the leftists' point of view on dividends and taxes.
Q:
Suppose a T-Bond futures contract has a duration of 9 years and has a current market price of $98,750. Market interest rates are 6 percent today but are expected to rise to 7.5 percent. What is the change in this futures contract's market price from this change in interest rates?
A) $12,577
B) -$12,577
C) $62,883
D) -$62,883
E) None of the above
Q:
Rightists argue that increasing a firm's dividend will increase its value. State some key points in their assertion.
Q:
State Miller and Modigliani's proposition on dividend irrelevance.
Q:
A futures contract on a 30 day Eurodollar time deposit is currently selling at an IMM index of 95.75 percent. The IMM index on a 30 day Eurodollar time deposit for immediate delivery is 95.10 percent. What is the basis risk for the futures contract?
A) 65 basis points
B) 65 basis points
C) 490 basis points
D) 425 basis points
E) There is no basis risk on this contract
Q:
A bank wishes to sell $350 million in new 30-day time deposits next month. Today interest rates are 7 percent. However, next month interest rates are expected to rise to 7.75 percent. What is the potential loss in profit for the month from this increase in interest rates? (Use a 360 day year)
A) $27.125 million
B) $24.500 million
C) $.2188 million
D) $2.625 million
E) There is no potential loss from this increase
Q:
Briefly explain the information content of share repurchase.
Q:
Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1000 million in assets and $750 million in liabilities. They are planning on trading in a Treasury bond future which has a duration of 8.5 years and which is selling right now for $99,000 for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself against interest rate risk?
A) 3714 contracts
B) 3125 contracts
C) 2971 contracts
D) 371 contracts
E) None of the above
Q:
Briefly discuss different ways in which a firm can pay dividends to its shareholders.
Q:
What is SEC Rule 10b-18? Briefly explain.
Q:
A bank that uses a short hedge is most likely:
A) Trying to avoid higher borrowing costs
B) Trying to avoid declining asset values
C) Trying to avoid lower than expected yields on from loans and securities
D) A and B above
Q:
A financial institution that uses a long hedge is most likely:
A) Trying to avoid higher borrowing costs
B) Trying to avoid declining asset values
C) Trying to avoid lower than expected yields on from loans and securities
D) A and B above
Q:
Briefly explain the chronology of dividend payment.
Q:
A financial institution that sells a particular futures contract and later purchases the same contract back is executing:
A) A long hedge
B) A short hedge
C) A sideways hedge
D) An up-side-down hedge
E) None of the above
Q:
If you accept the dividend irrelevancy theory, it is possible to maintain a high dividend clientele and still fund future growth.
Q:
A futures contract which calls for the delivery of a $100,000 T-bond with a minimum of 15 years to maturity is called a:
A) U.S. Treasury bond futures contract
B) One-month LIBOR futures contract
C) Eurodollar time deposit futures contract
D) Federal Funds futures contract
E) None of the above
Q:
The original work conducted on the dividend payout practices of companies was conducted by Lintner.
Q:
According to the textbook, the most popular option contracts used by banks today include:
A) Federal Funds futures contracts.
B) Eurodollar time deposit futures contracts.
C) U.S. Treasury bond futures contract.
D) All of the above.
E) None of the above.
Q:
Australia follows the imputation tax system.
Q:
A call option would most likely be used to:
A) Protect the value of fixed-rate loans and securities.
B) Offset a negative interest-sensitive gap.
C) Offset a positive duration gap.
D) Offset a negative duration gap.
E) None of the above.
Q:
Miller and Modigliani's argument for dividend irrelevance assumes an efficient market.
Q:
A put option would most likely be used to:
A) Protect fixed-rate loans and securities.
B) Protect variable-rate loans and securities.
C) Offset a positive interest-sensitive gap.
D) Offset a negative interest-sensitive gap.
E) None of the above.
Q:
Managers try to avoid reducing the dividend.
Q:
The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon (among other factors):
A) The relative duration of bank assets and liabilities.
B) The duration of the underlying security named in the futures contract.
C) The price of the futures contract.
D) All of the above.
E) None of the above.
Q:
Managers are reluctant to make dividend changes that may have to be reversed.
Q:
Stock repurchases are like bumper dividends, but they are not typically substitute for regular cash dividends.
Q:
The gain or loss to a bank from the use of a financial futures contract depends upon:
A) The duration of the underlying security named in the futures contract
B) The initial futures price
C) The change expected in interest rates divided by 1 + the original interest rate.
D) All of the above.
E) None of the above.
Q:
Firms have long-run target dividend payout ratios.
Q:
A bank seeking to avoid lower than expected yields from loans and security investments would be most likely to use:
A) A short or selling hedge in futures.
B) A long or buying hedge in futures.
C) A put option on futures contracts.
D) B and C above.
E) None of the above.
Q:
Dividend payments are used to change the capital structure by replacing equity with debt.
Q:
A bank wishing to avoid higher borrowing costs would be most likely to use:
A) A short or selling hedge in futures.
B) A long or buying hedge in futures.
C) A call option on futures contracts.
D) B and C above.
E) None of the above.
Q:
An alternative to paying cash dividends is to pay stock dividends.
Q:
An option buyer can:
A) Exercise the option.
B) Sell the option to another buyer.
C) Allow the option to expire.
D) All of the above.
E) A and B only.
Q:
Many companies have automatic dividend reinvestment plans (DRIPs).
Q:
Advantages of trading financial futures to hedge interest-rate risk include which of the following:
A) Only a fraction of the value of the contract must be pledged as collateral.
B) Brokers' commissions are relatively low.
C) There is no risk in trading futures contracts.
D) All of the above.
E) A and B only.
Q:
Because greenmail involves the repurchase of stock at a price higher than the market price, all shareholders benefit.
Q:
The realized return to a bank from a combined cash and futures market trading operation is composed of which of the following elements:
A) Return earned in the cash market.
B) Profit or loss from futures trading.
C) Difference between the opening and closing basis between cash and futures markets.
D) All of the above.
E) B and C only.
Q:
Usually "special" or "extra" dividend is unlikely to be repeated in the future.
Q:
A significant limitation to financial futures as an interest-rate hedging device is a special form of risk known as ___________ risk. Which of the following terms correctly completes the statement?
A) Default
B) Basis
C) Credit
D) Market
E) None of the above.
Q:
The managers of the firm set the dividend paid to the shareholders.
Q:
If a bank has a positive gap, that is, if it is asset sensitive, the bank can hedge its interest-rate risk by which of the following activities:
A) Reduce its asset maturities.
B) Reduce maturities of its liabilities.
C) Use a long hedge.
D) All of the above.
E) A and C only.
Q:
Adoption of Rule 10b-18 by the SEC, in the year 1982, has protected firms from being prosecuted for manipulating their share price through share repurchases.
Q:
A financial institution with a negative gap could reduce the risk of loss due to changing interest rates by:
A) Extending asset maturities
B) Increasing short-term interest-sensitive liabilities
C) Using financial futures or options contracts.
D) All of the above.
E) None of the above.
Q:
In 2005, ExxonMobil was the largest repurchaser of its own shares with $18.2 billion worth of repurchases.
Q:
Firms can pay out cash to their shareholders in two ways: cash dividends and stock dividends.
Q:
What dividend policy is probably the best from a financial standpoint, but not likely to be accepted by the market place or investors?
A. High dividend
B. Low dividend
C. Residual dividend
D. Signaling dividend
Q:
What would best explain the reluctance of General Motors to eliminate its dividend in 2008, only a few months before its financial collapse and eventual government takeover?
A. Clientele effect
B. Leftist theory
C. Rightest theory
D. Signaling hypothesis
Q:
Futures contracts can be traded , without the help of an organized exchange.
Q:
The financial futures markets are designed to shift the risk of interest rate fluctuations from risk-avers investors to .
Q:
A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 40% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system?
A. $A1.00
B. Zero
C. $A4.00
D. None of the above
Q:
A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system?
A. $A2.10
B. Zero
C. $A3.00
D. None of the above
Q:
When an investor buys or sells a futures contract, they must deposit a(n) when they first enter into the contract.
Q:
According to middle-of-the-roaders, a firm's value is not affected by its dividend policy because:
A. of the clientele effect
B. of the tax loopholes available to wealthy stockholders
C. well-managed companies prefer to signal their worth by paying high dividends
D. All of the above
Q:
If the corporate tax rate is 35%, what is the maximum effective tax rate on dividends received by another corporation?
A. 35%
B. 30%
C. 10.5%
D. None of the above
Q:
The largest banks account for more than 99 percent of derivatives activity in the U.S.
Q:
are financial assets that derive their value from some underlying instrument.
Q:
Which of the following investors have the strongest tax reason to prefer dividends over capital gains?
A. Pension funds
B. Financial institutions
C. Individuals
D. Corporations
Q:
Two corporations A and B have exactly the same risk and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax of 30% income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today?
A. $7
B. $13
C. $10
D. None of the above
Q:
One reason that banks use derivatives is to generate important , money that does not come from interest earned on loans and securities.
Q:
If investors have a marginal tax rate of 20% and a firm has announced a dividend of $5;
A. The price of stock should decrease by $4 on the ex-dividend date
B. The price of the stock should decrease by $5 on the ex-dividend date
C. The price of the stock should increase by $5 on the ex-dividend date
D. The price of the stock should increase by $4 on the ex-dividend date
Q:
The combination of both a cap and floor is known as an interest-rate _________.
Q:
An interest-rate _______ would protect the swap party receiving a fixed-rate payment and paying a floating-rate in a swap.
Q:
If dividends are taxed more heavily than capital gains, the investors:
A. Should be willing to pay more for stocks with low dividend yields
B. Should be willing to pay more for high dividend yields
C. Should be willing to pay the same for stocks regardless of the dividend yields
D. Cannot be predicted as stock prices fluctuate randomly
Q:
If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because:
A. Capital gains are actually taxed, while dividends are taxed on paper only
B. Dividends are taxed when distributed while capital gains are deferred until the stock is sold
C. Both dividends and capital gains are taxed every year
D. Both A and C
Q:
An interest-rate ________ would protect the swap party receiving a floating-rate payment in the swap.
Q:
If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?
A. Fall by more than the amount of the dividend
B. Fall exactly by the amount of the dividend
C. Fall by less than the amount of the dividend
D. Cannot be predicted
Q:
The _______ is the spread between the cash price and futures price of an underlying asset.
Q:
The category of derivative contract with the largest use by banks is __________.
Q:
According to behavioral finance investors prefer dividends because:
A. investors prefer the discipline that comes from spending only the dividends
B. of the tax consideration
C. stock market is efficient
D. all of the above