Question 1

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

Accepted Answer

A) ($20) 
B) 0 
C) $10 
D) $20 
A) ($20) 
B) 0 
C) $10 
D) $20

Question 2

How does the price of a put option respond to an interest rate increase?

Accepted Answer

A) Increases 
B) Decreases 
C) Remains the same 
D) Goes to zero 
A) Increases 
B) Decreases 
C) Remains the same 
D) Goes to zero

Question 3

Corporations that attach warrants to their bonds are hoping to:

Accepted Answer

A) sell equity without paying flotation costs. 
B) convert the bonds into stock at a later date. 
C) reduce the cost of debt by increasing bond prices. 
D) increase the price of their shares. 
A) sell equity without paying flotation costs. 
B) convert the bonds into stock at a later date. 
C) reduce the cost of debt by increasing bond prices. 
D) increase the price of their shares.

Question 4

Which of the following is true for an investor that owns a share of stock and has purchased a put option on the stock?

Accepted Answer

A) The investor profits when the stock decreases in value. 
B) Maximum loss is the price of the option premium. 
C) The investor is protected against upside potential. 
D) Increases in stock value go to the seller of the put. 
A) The investor profits when the stock decreases in value. 
B) Maximum loss is the price of the option premium. 
C) The investor is protected against upside potential. 
D) Increases in stock value go to the seller of the put.

Question 5

The payoffs from investing in options are designed so that:

Accepted Answer

A) both buyers and sellers can profit. 
B) the seller's (buyer's) gain is the buyer's (seller's) loss. 
C) roughly 20% of sellers and 50% of buyers profit. 
D) few buyers or sellers profit; they buy "insurance". 
A) both buyers and sellers can profit. 
B) the seller's (buyer's) gain is the buyer's (seller's) loss. 
C) roughly 20% of sellers and 50% of buyers profit. 
D) few buyers or sellers profit; they buy "insurance".

Question 6

A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):

Accepted Answer

A) put option. 
B) call option. 
C) option to expand. 
D) it is not an option. 
A) put option. 
B) call option. 
C) option to expand. 
D) it is not an option.

Question 7

You paid $5 a call option on a stock with an exercise price of $80.If the current stock price is $60, your net proceeds by exercising this option and selling the stock will be:

Accepted Answer

A) ($25). 
B) $0. 
C) $20. 
D) $60. 
A) ($25). 
B) $0. 
C) $20. 
D) $60.

Question 8

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit <loss> per share if the option is exercised tomorrow?

Accepted Answer

A) ($16) 
B) ($8) 
C) $8 
D) $16 
A) ($16) 
B) ($8) 
C) $8 
D) $16

Question 9

You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?

Accepted Answer

The depositor has in effect pu

Question 10

Determine the payoff and profits for a put option costing $25 with an exercise price of $175, and a stock price (at expiration) with a value of $145.

Accepted Answer

The answer of Determine the payoff and profits for a...

Question 11

Unlike call options, the option to abandon a real asset project does not become more valuable as time to expiration increases.

Accepted Answer

A) True 
 B)False

Question 12

Which graph represents a buying a put option?

Accepted Answer

The answer of Which graph represents a buying a put...

Question 13

If a convertible bond can be thought of as a straight bond with a call option, then the call is owned by the ___________ and the strike price is the ___________.

Accepted Answer

A) debt issuer; stock price 
B) debt issuer; straight bond value 
C) bond investor; stock price 
D) bond investor; straight bond value 
A) debt issuer; stock price 
B) debt issuer; straight bond value 
C) bond investor; stock price 
D) bond investor; straight bond value

Question 14

Which of the following is correct for the owner of a September put, valued at $20, on CBA Corp.with a strike price of $80? CBA currently trades at $67.

Accepted Answer

A) The option will continue to gain value until its September expiration. 
B) The owner profits $13 per share by exercising now. 
C) Further decreases in CBA stock price will be translated directly into additional option value. 
D) $20 is the maximum value for this option. 
A) The option will continue to gain value until its September expiration. 
B) The owner profits $13 per share by exercising now. 
C) Further decreases in CBA stock price will be translated directly into additional option value. 
D) $20 is the maximum value for this option.

Question 15

A protective put is a costless way of eliminating the downside risk if holding stock.

Accepted Answer

A) True 
 B)False

Question 16

A decrease in which of the following terms will cause an increase in the call value of an option?

Accepted Answer

A) Interest rates 
B) Time to maturity 
C) Exercise price 
D) Volatility of the stock 
A) Interest rates 
B) Time to maturity 
C) Exercise price 
D) Volatility of the stock

Question 17

Which of the following statements is correct for an investor who has purchased "portfolio insurance," by owning the stock and buying a put option on the stock?

Accepted Answer

A) The investor profits when the stock price declines. 
B) Maximum profitability occurs when stock price equals strike price. 
C) Value per share can decline no further than the strike price less the value of the option premium. 
D) The option will certainly be exercised. 
A) The investor profits when the stock price declines. 
B) Maximum profitability occurs when stock price equals strike price. 
C) Value per share can decline no further than the strike price less the value of the option premium. 
D) The option will certainly be exercised.

Question 18

The holder of a convertible bond is required to convert the bond into stock at maturity.

Accepted Answer

A) True 
 B)False

Question 19

The seller of a put option is betting that the market value of the stock will decrease.

Accepted Answer

A) True 
 B)False

Question 20

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

Accepted Answer

A) $.50 shares 
B) $.75 shares 
C) $.63 shares 
D) $1.25 shares 
A) $.50 shares 
B) $.75 shares 
C) $.63 shares 
D) $1.25 shares

Exam 25: Options

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

How does the price of a put option respond to an interest rate increase?

Corporations that attach warrants to their bonds are hoping to:

Which of the following is true for an investor that owns a share of stock and has purchased a put option on the stock?

The payoffs from investing in options are designed so that:

A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):

You paid $5 a call option on a stock with an exercise price of $80.If the current stock price is $60, your net proceeds by exercising this option and selling the stock will be:

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit <loss> per share if the option is exercised tomorrow?

You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?

Determine the payoff and profits for a put option costing $25 with an exercise price of $175, and a stock price (at expiration) with a value of $145.

Unlike call options, the option to abandon a real asset project does not become more valuable as time to expiration increases.

Which graph represents a buying a put option?

If a convertible bond can be thought of as a straight bond with a call option, then the call is owned by the ___________ and the strike price is the ___________.

Which of the following is correct for the owner of a September put, valued at $20, on CBA Corp.with a strike price of $80? CBA currently trades at $67.

A protective put is a costless way of eliminating the downside risk if holding stock.

A decrease in which of the following terms will cause an increase in the call value of an option?

Which of the following statements is correct for an investor who has purchased "portfolio insurance," by owning the stock and buying a put option on the stock?

The holder of a convertible bond is required to convert the bond into stock at maturity.

The seller of a put option is betting that the market value of the stock will decrease.

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

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Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

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Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

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If a convertible bond can be thought of as a straight bond with a call option, then the call is owned by the _ and the strike price is the _.