Question 1

The floor of a convertible bond will be the value of the underlying bond.

Accepted Answer

A) True 
 B)False

Question 2

The conversion ratio for a convertible bond equals the:

Accepted Answer

A)  ratio of bond value to stock price at conversion. 
B)  number of bonds necessary to convert into one share of stock. 
C)  number of shares of stock that can be exchanged for one bond. 
D)  floor value beneath which the bond price cannot fall. 
A)  ratio of bond value to stock price at conversion. 
B)  number of bonds necessary to convert into one share of stock. 
C)  number of shares of stock that can be exchanged for one bond. 
D)  floor value beneath which the bond price cannot fall.

Question 3

You are currently holding 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 will be:

Accepted Answer

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

Question 4

What is the value of a convertible bond with a conversion ratio of 25,face value of $1,000,coupon of 10% and yield of 10 percent? Common stock of this firm is currently selling at $35.

Accepted Answer

A)  $875 
B)  $1,000 
C)  $1,125 
D)  $1,875 
A)  $875 
B)  $1,000 
C)  $1,125 
D)  $1,875

Question 5

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 6

Under which condition does a call option approach its upper bound?

Accepted Answer

A)  When the stock price is far above the strike price. 
B)  When the stock price is closest to the strike price. 
C)  When the stock price is approaching zero. 
D)  When the option is approaching its expiration time. 
A)  When the stock price is far above the strike price. 
B)  When the stock price is closest to the strike price. 
C)  When the stock price is approaching zero. 
D)  When the option is approaching its expiration time.

Question 7

The buyer of a call option has the obligation to buy shares at the strike price.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is correct concerning call options?

Accepted Answer

A)  Value of a call option at expiration will be greater than the stock price. 
B)  Value of a call option at expiration will be equal to the exercise price. 
C)  Value of a call option at expiration will be equal to the difference between the stock price and exercise price. 
D)  Value of a call option at expiration will be equal to zero. 
A)  Value of a call option at expiration will be greater than the stock price. 
B)  Value of a call option at expiration will be equal to the exercise price. 
C)  Value of a call option at expiration will be equal to the difference between the stock price and exercise price. 
D)  Value of a call option at expiration will be equal to zero.

Question 9

The lower limit on value of a call option is:

Accepted Answer

A)  zero. 
B)  less than zero. 
C)  stock price minus exercise price. 
D)  exercise price. 
A)  zero. 
B)  less than zero. 
C)  stock price minus exercise price. 
D)  exercise price.

Question 10

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

Accepted Answer

A)  The firm is in poor financial health. 
B)  Interest rates have risen substantially since the bond was issued. 
C)  Interest rates have fallen substantially since the bond was issued. 
D)  The call option is ready to expire. 
A)  The firm is in poor financial health. 
B)  Interest rates have risen substantially since the bond was issued. 
C)  Interest rates have fallen substantially since the bond was issued. 
D)  The call option is ready to expire.

Question 11

The value of a callable bond equals the value of a straight bond:

Accepted Answer

A)  plus the value of the bondholder's call option. 
B)  minus the value of the bondholder's call option. 
C)  plus the value of the issuer's call option. 
D)  minus the value of the issuer's call option. 
A)  plus the value of the bondholder's call option. 
B)  minus the value of the bondholder's call option. 
C)  plus the value of the issuer's call option. 
D)  minus the value of the issuer's call option.

Question 12

What price risk is an investor exposed to if she owns a share of stock and has purchased a put option on the stock?

Accepted Answer

This package protects the investor from

Question 13

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration,then the option:

Accepted Answer

A)  expires worthless. 
B)  will not be exercised. 
C)  is worth at least $7 per share. 
D)  cost too much initially. 
A)  expires worthless. 
B)  will not be exercised. 
C)  is worth at least $7 per share. 
D)  cost too much initially.

Question 14

Only at the expiration date can an investor expect to find the value of call options above their lower bound.

Accepted Answer

A) True 
 B)False

Question 15

The option to abandon a project investing in real assets can be considered to have a strike price equal to the:

Accepted Answer

A)  historical cost of the asset. 
B)  market value of the asset at abandonment. 
C)  forgone revenues anticipated from the project. 
D)  forgone interest on the bonds used to finance the real assets. 
A)  historical cost of the asset. 
B)  market value of the asset at abandonment. 
C)  forgone revenues anticipated from the project. 
D)  forgone interest on the bonds used to finance the real assets.

Question 16

When does a change in the value of a call option come the closest to matching the price change in a share of stock?

Accepted Answer

A)  When the stock is priced far above the strike price. 
B)  When the stock is priced far below the strike price. 
C)  When the stock is priced very near the strike price. 
D)  Changes in call value always come close to matching changes in stock price. 
A)  When the stock is priced far above the strike price. 
B)  When the stock is priced far below the strike price. 
C)  When the stock is priced very near the strike price. 
D)  Changes in call value always come close to matching changes in stock price.

Question 17

Why should a convertible bond always be valued at more than its bond value or its conversion value up until maturity?

Accepted Answer

A)  The bondholder is receiving higher interest rates. 
B)  The conversion value does not have an upper bound. 
C)  The conversion ratio may be decreased. 
D)  The bond does not have to be given up to exercise the option. 
A)  The bondholder is receiving higher interest rates. 
B)  The conversion value does not have an upper bound. 
C)  The conversion ratio may be decreased. 
D)  The bond does not have to be given up to exercise the option.

Question 18

The value of a call option increases as the time to expiration increases because:

Accepted Answer

A)  the exercise price continually decreases. 
B)  opportunity increases to surpass exercise price. 
C)  dividends accumulate while waiting to be paid. 
D)  the option can be repeatedly exercised. 
A)  the exercise price continually decreases. 
B)  opportunity increases to surpass exercise price. 
C)  dividends accumulate while waiting to be paid. 
D)  the option can be repeatedly exercised.

Question 19

The value of a convertible bond is less than the value of a straight bond with similar coupon and maturity.

Accepted Answer

A) True 
 B)False

Question 20

What options may be provided in financial securities?

Accepted Answer

Many of the securities that firms issue

Exam 25: Options

The floor of a convertible bond will be the value of the underlying bond.

The conversion ratio for a convertible bond equals the:

You are currently holding 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 will be:

What is the value of a convertible bond with a conversion ratio of 25,face value of $1,000,coupon of 10% and yield of 10 percent? Common stock of this firm is currently selling at $35.

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?

Under which condition does a call option approach its upper bound?

The buyer of a call option has the obligation to buy shares at the strike price.

Which of the following statements is correct concerning call options?

The lower limit on value of a call option is:

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

The value of a callable bond equals the value of a straight bond:

What price risk is an investor exposed to if she owns a share of stock and has purchased a put option on the stock?

If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration,then the option:

Only at the expiration date can an investor expect to find the value of call options above their lower bound.

The option to abandon a project investing in real assets can be considered to have a strike price equal to the:

When does a change in the value of a call option come the closest to matching the price change in a share of stock?

Why should a convertible bond always be valued at more than its bond value or its conversion value up until maturity?

The value of a call option increases as the time to expiration increases because:

The value of a convertible bond is less than the value of a straight bond with similar coupon and maturity.

What options may be provided in financial securities?

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