CMU

Enrichment Learning Activity

Name: Date:
Year and Section: Instructor:
Module #: Topic:

Directions: Put your answers on the blank

1. After bifurcation, the embedded derivative is accounted for

a. at cost c. lower of a and b
b. at fair value d. either a or b
ANSWER: _______

2. An option to convert a convertible bond into shares of common stock is a(n)

a. embedded derivative. c. hybrid security.
b. host security. d. fair value hedge.
ANSWER: ______

3. Where in its financial statements should a company disclose information about its concentration of credit risks?
a. No disclosure is required.
b. The notes to the financial statements.
c. Supplementary information to the financial statements.
d. Management's report to shareholders.
ANSWER: __________

4. Which of the following risks are inherent in an interest rate swap agreement?
I. The risk of exchanging a lower interest rate for a higher interest rate.
II. The risk of nonperformance by the counterparty to the agreement.
a. I only. c. Both I and II.
b. II only. d. Neither I nor II.
ANSWER: ___________

5. Disclosure of information about significant concentrations of credit risk is required for:

a. All financial instruments.
b. Financial instruments with off-balance-sheet credit risk only.
c. Financial instruments with off-balance-sheet market risk only.
d. Financial instruments with off-balance-sheet risk of accounting loss only.
ANSWER: __________

SY2021-2022 1st Term Homework

 CMU
Enrichment Learning Activity

Use the following information for the next five questions:

Hall, Inc., enters a call option contract with Bennett Investment Co. on January 2, 2002. This contract gives Hall the option
to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2002. WSM shares are trading at
$100 per share on January 2, 2002, at which time Hall pays $400 for the call option.

6. Refer to Hall, Inc. The call option would be recorded in the accounts of Hall as
a. an asset.
b. a liability.
c. a gain.
d. would not be recorded in the accounts (memorandum entry only).
ANSWER: _______

7. Refer to Hall, Inc. Assume that the price of the WSM shares has risen to $120 per share on March 31, 2002, and the Hall
is preparing financial statements for the quarter ending March 31. As regards this option, Hall, Inc., would report which
of the following?
a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. a description of the change in price would be disclosed in the notes to the financial statements.
d. Nothing would be reported in the financial statements or the notes thereto.
ANSWER: __________

8. Refer to Hall, Inc. The 1,000 shares of WSM stock in this contract is referred to as
a. the collateral. c. the option premium.
b. the notional amount. d. the derivative.
ANSWER: _________

9. Refer to Hall, Inc. The $400 paid by Hall, Inc., to Baird Investment is referred to as
a. the option premium. c. the strike price.
b. the notional amount. d. the intrinsic value.
ANSWER: _________
10. Refer to Hall, Inc. Assume that the price per share of WSM stock is $120 on April 30, 2002, and that the time value of
the option has not changed. In order to settle the option contract, Hall, Inc., would most likely
a. pay Baird Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the shares at $120 per share to Baird.
c. receive $20,000 from Baird Investment.
d. receive $400 from Baird Investment.
ANSWER: _________

SY2021-2022 1st Term Homework