Practice MCQ questions - August 2010

1. If Rolls Royce’s shares sell for 593p, a September call option with an exercise price of 600p will have an exercise value of:

A 0p

B < 0p C > 0p D 7p exactly

2. For companies with unstable earnings

A a dividend policy of stable growth in dividends means an unstable payout ratio B a dividend policy of stable growth in dividends means a stable payout ratio C a dividend policy of a stable payout ratio means volatile dividends per share through time

D both A and C

3. You hold a Barclays 350 put option, the shares at expiry close at 358p, you paid 5p for the put. Which of the following is your profit or loss at expiry?

A 5p loss B 3p loss C 3p gain D 8p gain

4. Which of the following is correct?

I call option price falls with higher interest rates II futures have an asymmetric payoff III interest rate swaps involve the swapping of interest and principal payments

A I only B I and II only C I and III only D None of I, II or III are correct

5. You have arranged to borrow £125,000 from the bank, which requires you to repay the loan with four payments of £39,500 starting at the end of the first year. What is the interest rate you are being charged?

A 9% B 10% C 11% D 12%

6. An investment has the following possible returns; 500, 550, 600, 725 and 800. The probabilities of obtaining these returns are 0.10, 0.20, 0.40, 0.20, 0.10 respectively. Which of the following is the standard deviation of the returns from this investment (to the nearest figure below)?

A 50 B 60 C 90 D 100

7. The rightist view of dividends said that companies should

A use the dividend to fund good projects and pay dividend from cash that remains B pay a low dividend because of the harmful impact