Question 1

Investors who hold warrants essentially have a:

Accepted Answer

A)  put option on the firm's bonds. 
B)  put option on the firm's equity. 
C)  call option on the firm's bonds. 
D)  call option on the firm's equity. 
A)  put option on the firm's bonds. 
B)  put option on the firm's equity. 
C)  call option on the firm's bonds. 
D)  call option on the firm's equity.

Question 2

At what point is the payoff from owning a call option on a stock greater than the payoff from owning the stock itself?

Accepted Answer

A)  When stock price exceeds strike price at expiration 
B)  When strike price exceeds stock price at expiration 
C)  When stock price equals strike price at expiration 
D)  Call payoff never exceeds stock payoff. 
A)  When stock price exceeds strike price at expiration 
B)  When strike price exceeds stock price at expiration 
C)  When stock price equals strike price at expiration 
D)  Call payoff never exceeds stock payoff.

Question 3

Circular File stock is selling for $25 a share.You see that call options on the stock with exercise price of $20 are selling at $3.What should you do? What will happen to the option price as investors identify this opportunity? Then you observe that put options on Circular File with exercise price $30 are selling for $4.What should you do?

Accepted Answer

On seeing the call options:
Buy a call o

Question 4

What is the payoff to buyers and sellers of call and put options?

Accepted Answer

The payoff to a call option is the value

Question 5

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 6

The major difference between options on real assets and options on financial assets is that options on:

Accepted Answer

A)  financial assets are costly. 
B)  financial assets have a higher probability of positive payoff. 
C)  real assets are implicit, rather than explicit. 
D)  real assets are not influenced by price volatility. 
A)  financial assets are costly. 
B)  financial assets have a higher probability of positive payoff. 
C)  real assets are implicit, rather than explicit. 
D)  real assets are not influenced by price volatility.

Question 7

A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.

Accepted Answer

A) True 
 B)False

Question 8

The longer the time until expiration of a call option,the greater the value of the option.

Accepted Answer

A) True 
 B)False

Question 9

Which is the best definition of a put option?

Accepted Answer

A)  The right to buy an asset at a fixed price during a particular time period. 
B)  The right to sell an asset at a fixed price during a particular time period. 
C)  A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time. 
D)  The act of buying or selling the underlying asset via the option contract. 
A)  The right to buy an asset at a fixed price during a particular time period. 
B)  The right to sell an asset at a fixed price during a particular time period. 
C)  A security that gives the holder the right to purchase shares of a stock at a fixed price over a period of time. 
D)  The act of buying or selling the underlying asset via the option contract.

Question 10

The value of both call and put options increase as the variability of the stock price increases.

Accepted Answer

A) True 
 B)False

Question 11

Assist the holder of a $1,000 par value convertible bond in determining whether to convert,given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

Accepted Answer

Conversion Value = 15.5 × 70 = $1,085
Th

Question 12

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share,then:

Accepted Answer

A)  the bond will be converted immediately. 
B)  the bond is violating its "price floor". 
C)  conversion now would give the investor a profit of $900. 
D)  the conversion value of the bond is $900. 
A)  the bond will be converted immediately. 
B)  the bond is violating its "price floor". 
C)  conversion now would give the investor a profit of $900. 
D)  the conversion value of the bond is $900.

Question 13

Stocks that have more volatile price changes have more valuable call options because call holders:

Accepted Answer

A)  capture upside potential without downside risk. 
B)  realize that volatility decreases the present value of the exercise price. 
C)  have too little variability in the exercise price. 
D)  have transferred all risk to put holders. 
A)  capture upside potential without downside risk. 
B)  realize that volatility decreases the present value of the exercise price. 
C)  have too little variability in the exercise price. 
D)  have transferred all risk to put holders.

Question 14

What options may be provided in financial securities?

Accepted Answer

Many of the securities that firms issue

Question 15

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Accepted Answer

A) True 
 B)False

Question 16

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

Accepted Answer

A)  ($14) 
B)  ($10) 
C)  $10 
D)  $18 
A)  ($14) 
B)  ($10) 
C)  $10 
D)  $18

Question 17

What is the profit per share for an investor who has purchased a share of stock and two put options with an exercise price of $40,given that the purchase price of the stock was $42,each put cost $2 per share,and the stock was valued at $30 at expiration?

Accepted Answer

A)  ($16) 
B)  ($6) 
C)  ($4) 
D)  $4 
A)  ($16) 
B)  ($6) 
C)  ($4) 
D)  $4

Question 18

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 19

Recently you bought a call and a put option on a stock with a common exercise price of $75.The call premium was $5 and the put premium was $3.You will make money from this position if the stock price is:

Accepted Answer

A)  greater than $75, but less than $78. 
B)  greater than $75, but less than $80. 
C)  greater than $72, but less than $75. 
D)  less than $67, or greater than $83. 
A)  greater than $75, but less than $78. 
B)  greater than $75, but less than $80. 
C)  greater than $72, but less than $75. 
D)  less than $67, or greater than $83.

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

Investors who hold warrants essentially have a:

At what point is the payoff from owning a call option on a stock greater than the payoff from owning the stock itself?

What is the payoff to buyers and sellers of call and put options?

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

The major difference between options on real assets and options on financial assets is that options on:

A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.

The longer the time until expiration of a call option,the greater the value of the option.

Which is the best definition of a put option?

The value of both call and put options increase as the variability of the stock price increases.

Assist the holder of a $1,000 par value convertible bond in determining whether to convert,given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share,then:

Stocks that have more volatile price changes have more valuable call options because call holders:

What options may be provided in financial securities?

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

What is the profit per share for an investor who has purchased a share of stock and two put options with an exercise price of $40,given that the purchase price of the stock was $42,each put cost $2 per share,and the stock was valued at $30 at expiration?

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 ___________.

Recently you bought a call and a put option on a stock with a common exercise price of $75.The call premium was $5 and the put premium was $3.You will make money from this position if the stock price is:

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?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

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

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Risk Management

Filters

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 _.