1|Page
Finance 306 Final Exam ACTUAL VERIFIED
QUESTIONS AND CORRECT DETAILED ANSWERS
LATEST UPDATE.pdf 1
Firms typically use ____ positions in futures contracts to
hedge an asset that declines in value as interest rates rise
- Answer-Short
A macrohedge is a - Answer-Hedge of an entire balance
sheet
A forward hedge is different from a futures hedge in that: -
Answer-Forwards contracts can involve nonstandardized
amounts whereas futures are standardized
You have taken a long position in a call option on ABC
common stock. The option has an exercise price of $100
and the stock is currently trading at $110. The option
premium is $8. What is your net profit on the option if
ABC's stock price increases to $111 at expiration? -
Answer-$3
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In a plain vanilla swap - Answer-One participant pays a
fixed rate of interest and the other party pays a variable
rate of interest.`
Advantages of securitization typically all but which one of
the following - Answer-Increase in net interest income
Which one of the following forms of securitization is
usually double securitization - Answer-Collateralized
mortgage obligations
The FDIC is concerned about issuance of mortgage-
backed bonds (MBBs) because: - Answer-The agency is
concerned about investors prepayment risk
In a 3-class CMO, Class A has the ____ prepayment
protection while with Class C has the____ prepayment
function - Answer-least, most
If you are doing an NPV analysis and using the WACC as
the discount rate, how do you account for interest paid to
bondholders? - Answer-through the cost of debt portion of
the WACC
, 3|Page
When estimating the WACC, which is the best measure of
the firm's cost of debt - Answer-the YTM for its bonds
When estimating the WACC, which is the best measure of
the firm's cost of equity - Answer-the stock's expected
return according to the CAPM
When computing NPV, how do you account for the fact
that bond interest is tax deductible? - Answer-multiply the
cost of debt by (1-t)
What does EBIT stand for? - Answer-earnings before
interest and taxes
how should you handle an interest payment on debt when
computing incremental cash flow? - Answer-ignore it
how should you handle depreciation when computing
incremental cash flow? - Answer-subtract it just like on an
income statement, but add it back after computing taxes
an increase in net working capital represents - Answer-a
cash outflow
Finance 306 Final Exam ACTUAL VERIFIED
QUESTIONS AND CORRECT DETAILED ANSWERS
LATEST UPDATE.pdf 1
Firms typically use ____ positions in futures contracts to
hedge an asset that declines in value as interest rates rise
- Answer-Short
A macrohedge is a - Answer-Hedge of an entire balance
sheet
A forward hedge is different from a futures hedge in that: -
Answer-Forwards contracts can involve nonstandardized
amounts whereas futures are standardized
You have taken a long position in a call option on ABC
common stock. The option has an exercise price of $100
and the stock is currently trading at $110. The option
premium is $8. What is your net profit on the option if
ABC's stock price increases to $111 at expiration? -
Answer-$3
,2|Page
In a plain vanilla swap - Answer-One participant pays a
fixed rate of interest and the other party pays a variable
rate of interest.`
Advantages of securitization typically all but which one of
the following - Answer-Increase in net interest income
Which one of the following forms of securitization is
usually double securitization - Answer-Collateralized
mortgage obligations
The FDIC is concerned about issuance of mortgage-
backed bonds (MBBs) because: - Answer-The agency is
concerned about investors prepayment risk
In a 3-class CMO, Class A has the ____ prepayment
protection while with Class C has the____ prepayment
function - Answer-least, most
If you are doing an NPV analysis and using the WACC as
the discount rate, how do you account for interest paid to
bondholders? - Answer-through the cost of debt portion of
the WACC
, 3|Page
When estimating the WACC, which is the best measure of
the firm's cost of debt - Answer-the YTM for its bonds
When estimating the WACC, which is the best measure of
the firm's cost of equity - Answer-the stock's expected
return according to the CAPM
When computing NPV, how do you account for the fact
that bond interest is tax deductible? - Answer-multiply the
cost of debt by (1-t)
What does EBIT stand for? - Answer-earnings before
interest and taxes
how should you handle an interest payment on debt when
computing incremental cash flow? - Answer-ignore it
how should you handle depreciation when computing
incremental cash flow? - Answer-subtract it just like on an
income statement, but add it back after computing taxes
an increase in net working capital represents - Answer-a
cash outflow
