Question

​​​​​​1. How many years left in “year-to-maturity” a 10-year bond outstanding with 10% annual coupon rate,$70 in annual payment, $925.39 in its present value, and $1,000 in its future value A. 3 years B. 10 years C. 6 years D. 8 years E. 1 years

2. What is the present value of an outstanding T-bond with 8 years left in “year-to-maturity”, $1,000 future value, 3% annual coupon rate and $20 in annual payment? A. 892 B. 930 C. 1160 D 967 E 1087

3. An equity long positions means ___, while short positions means___. A. buy to own, buy call option B. buy to own, sell by borrowing C. sell by borrowing, sell put options D. buy call options, sell put options

4. Some of the financial hedging/speculation products are (Select all correct answers):

	A.	Call option on Apple Inc. (AAPL) stock.
	B.	Future contract on crude oil.
	C.	Put option on Amazon.com Inc. (AMZN) stock.
	D.	Future Contract on British Pound.
	E.	Future Contract on Dow Jones Index.

Answer 1

Answer(1): 3 years left to maturity. We can calculate years to maturity with the YTM formula.

YTM = {C+ (F-P) / n} / (F+P)/ 2

YTM = {70 + (1000-925.39) / n} / (1000+925.39) / 2

n = 3 years

Answer(2): $930 is the present value of bond.

Formula: C * [1-(1/(1+r)ⁿ )] / r + F / (1+r)ⁿ

Putting all the given values in the formula, we get:

BOND VALUE = 20 * [1-(1/(1+.03)⁸ ) ] / .03 + 1000 / (1+.03)⁸

Bond value = $929.80 or $930.

Answer(3): An equity long position means, "Buy to own" and an equity short position means, "Sell by borrowing".

When an inventor takes long position in equity market, it means, he/she is buying the stock to own and when he shorts the stock, it means, he is selling the stocks (on leverage) without having it.

Answer(4): Hedging/speculator products are all of the following:

• Call option on Apple Inc. (AAPL) stock.
• Future contract on crude oil.
• Put option on Amazon.com Inc. (AMZN) stock
• Future Contract on British Pound.
• Future Contract on Dow Jones Index.

Futures and options are the part of derivatives. Above all futures and options are used for hedging and speculation.

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