which is the most risky transaction to undertake in the stock index option markets i 551654

The following multiple-choice problems are based on questions that appeared in past CFA examinations.

a. A firm’s preferred stock often sells at yields below its bonds because:

i. Preferred stock generally carries a higher agency rating.

ii. Owners of preferred stock have a prior claim on the firm’s earnings.

iii. Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation.

iv. Corporations owning stock may exclude from income taxes most of the dividend income they receive.

b. A municipal bond carries a coupon of 6 3/4% and is trading at par; to a taxpayer in a 34% tax bracket, this bond would provide a taxable equivalent yield of:

i. 4.5%

ii. 10.2%

iii. 13.4%

iv. 19.9%

c. Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed?

i. Write a call option.

ii. Write a put option

iii. Buy a call option.

iv. Buy a put option.