$1.$ 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 $63$

$4\%$ and is trading at par; to a taxpayer in a

$34\%$ tax bracket, this bond would provide a taxable equivalent yield of:

i$.4\mathrm{.}5\%$

ii$.10\mathrm{.}2\%$

iii. $13\mathrm{.}4\%$

iv$.19\mathrm{.}9\%$

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.