Question 1

The right, but not the obligation, to purchase an asset at a specified price is called a ____ option.

Accepted Answer

A call option gives the holder the right, but not the obligation, to purchase an asset at a specified price, known as the strike price. This allows the holder to benefit from an increase in the price of the underlying asset, without having to actually own the asset itself. A put option, on the other hand, gives the holder the right to sell an asset at a specified price, and is used to protect against a decline in the price of the underlying asset. European, American, and Bermudan refer to different exercise styles of options, and are not relevant to the question asked.

Question 2

Long-term debt issued by either the government or a corporation that pays fixed payments based on a preset schedule is referred to as:

Accepted Answer

Fixed-income securities refer to long-term debt issued by either the government or a corporation that pays fixed payments based on a preset schedule. Derivative assets are financial instruments whose value is based on the value of another underlying asset. Money market securities are short-term debt instruments with maturities of one year or less. Equities refer to stocks or shares of ownership in a company. Prime loans are loans made to borrowers with high creditworthiness.

Question 3

The unit of ownership in a corporation when purchasing common shares is called a ______.

Accepted Answer

When purchasing common shares in a corporation, the unit of ownership is called a share. A coupon is a certificate used for a discount or rebate, a put is a financial option, an option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price, and a contract is a binding agreement.

Question 4

A bond that can be exchanged for a fixed number of shares of the issuing firm's stock at the bondholder's discretion is a(n) ________ bond.

Accepted Answer

The bond described is a convertible bond because it has the option to be exchanged for a fixed number of shares of the issuing firm's stock at the bondholder's discretion. A stock bond would imply that the bond itself represents ownership in the company similar to owning stock, which is not the case. An equity bond is not a commonly used term in finance, and a market bond is also not a standard term. An exchange bond is a possible term, but convertible bond is more commonly used to describe this specific feature.

Question 5

Debt issued by large corporations or governments that matures in a year or less is known as a:

Accepted Answer

Debt issued by large corporations or governments that matures in a year or less is generally considered a money market security. This includes treasury bills, commercial paper, and certificates of deposit. Options A, C, D, and E are not correct as they may refer to different types of financial instruments with longer maturities or different characteristics.

Question 6

An agreement made today regarding the terms of a trade that will take place at a later date is called a(n) ___________.

Accepted Answer

A futures contract is an agreement made today but the trade will take place at a later date. It is a standardized contract that involves the buying or selling of an underlying asset at a predetermined price and time in the future. The underlying assets can be commodities, currencies, indices, stocks, etc.

Question 7

What are the three basic types of financial assets?

Accepted Answer

Interest-bearing assets (like bonds), equities (like stocks), and derivatives (like options) are the three basic types of financial assets, each representing different forms of investment and ways to generate returns.

Question 8

An option contract that can only be exercised on the expiration date is called a(n) ________ option.

Accepted Answer

European options can only be exercised on the expiration date, while American options can be exercised at any time before expiration and Bermudan options can be exercised on specific dates before expiration. A put or call option indicates whether the holder has the right to sell or buy a security at a specified price, but the type of option does not affect the exercise date.

Question 9

An option contract that can be exercised up to and including the expiration date is called a(n) _______ option.

Accepted Answer

An option that can be exercised up to and including the expiration date is called an American option. European options can only be exercised on the expiration date, while Bermudan options can be exercised on specific dates before and including the expiration date. Put and call options refer to whether the holder has the right to sell or buy an underlying asset at a predetermined price, but do not specify the exercise flexibility.

Question 10

A primary asset is defined as

Accepted Answer

A primary asset is a security originally sold by a corporation or government to raise funds, which represents a claim to the issuer's assets. This can include stocks, bonds, and other financial instruments. The other options do not accurately describe a primary asset.

Question 11

A bond's _______ sets the dollar amount of its annual interest payments.

Accepted Answer

The coupon rate is a fixed percentage of a bond's par value that determines the dollar amount of its annual interest payments.

Question 12

The _________ is a bond's annual interest payment divided by its current market price.

Accepted Answer

The current yield is calculated by dividing the bond's annual interest payment (coupon rate) by its current market price.

Question 13

The price specified in an options contract at which the underlying asset can be bought or sold is the _____, which is also known as ______ price.

Accepted Answer

The price specified in an options contract at which the underlying asset can be bought or sold is the Strike Price, which is also known as Exercise Price.

Question 14

The price received when an option contract is sold is called the _______.

Accepted Answer

The price received when an option contract is sold is called the premium.

Question 15

A traded futures contract is ________ as it specifies in detail the quantity and the quality of the underlying asset and where it is to be delivered.

Accepted Answer

A traded futures contract is standardized as it has a set of predetermined terms and conditions. These terms include the quantity and quality of the underlying asset, the delivery location, and the expiration date. This allows for easy trading and hedging of the underlying asset without the need for negotiation or customization.

Question 16

A ______ option gives the owner the right, but not the obligation, to sell an asset at a specified price.

Accepted Answer

A put option gives the owner the right to sell an asset at a specified price, but not the obligation. This differs from a call option, which gives the owner the right to buy an asset at a specified price. European, American, and Bermudan refer to the exercise style of the option, not its underlying characteristics.

Question 17

A(n) _______ contract is an agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specified price for a specified time period.

Accepted Answer

An option contract gives the owner the right, but not the obligation, to buy or sell a specific asset at a specified price for a specified time period.

Question 18

A financial asset which represents a claim on another financial asset is called a ______ asset.

Accepted Answer

A derivative asset derives its value from another underlying asset or financial instrument. Examples include options, futures, swaps, and forwards.

Question 19

Which of the following is NOT a characteristic of common stock?

Accepted Answer

Common stock does not have a fixed cash flow, unlike bonds which have a fixed interest payment. The other choices are characteristics of common stock - potential for capital gains, voting rights, ownership in a corporation, and dividend payments (though not guaranteed).

Question 20

Using an option contract to buy or sell the underlying asset is called ________ the option.

Accepted Answer

Exercising the option refers to the act of using the option contract to buy or sell the underlying asset. Writing an option refers to selling or creating an option contract. Making an option is not a commonly used term in options trading. Converting and maturing are not applicable to options contracts.

Quiz 4: Overview of Security Types