Question 1

Why would bondholders be willing to pay more for bonds that contain warrants?

Accepted Answer

A warrant offers an option to the bondho

Question 2

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 3

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 4

Stock price volatility is beneficial to option holders.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is correct for the owner of a June call, valued at $3, on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

Accepted Answer

A) XYZ is expected to go to $63 per share 
B) The option cannot currently be exercised 
C) The option owner's current profit is $3 per share 
D) The option may expire without value 
A) XYZ is expected to go to $63 per share 
B) The option cannot currently be exercised 
C) The option owner's current profit is $3 per share 
D) The option may expire without value

Question 6

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 7

Callable bonds give the option to the issuing firm and hence reduce the value of the bond.

Accepted Answer

A) True 
 B)False

Question 8

Warrants are call options on a company's stock issued by an organized stock exchange.

Accepted Answer

A) True 
 B)False

Question 9

Which graph represents a selling a put option?

Accepted Answer

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

Question 10

Under what circumstance will the buyer of a put option be asked to perform his or her obligation?

Accepted Answer

A) When the stock price has declined below the strike price 
B) When the stock price has increased above the strike price 
C) The put buyer has an equal obligation regardless of the relationship between stock and strike prices 
D) The put buyer has no obligation whatsoever 
A) When the stock price has declined below the strike price 
B) When the stock price has increased above the strike price 
C) The put buyer has an equal obligation regardless of the relationship between stock and strike prices 
D) The put buyer has no obligation whatsoever

Question 11

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 12

Stock options have been traded on exchanges since:

Accepted Answer

A) The founding of the New York Stock Exchange 
B) Options were discovered in 1946 
C) The early part of the 1970s 
D) Just before the stock market crash in 1987 
A) The founding of the New York Stock Exchange 
B) Options were discovered in 1946 
C) The early part of the 1970s 
D) Just before the stock market crash in 1987

Question 13

If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is currently selling for $22 per share, then the:

Accepted Answer

A) Bond should trade for $900 
B) Bond should trade for $1,000 
C) Bond should trade for $1,100 
D) Firm will have already converted the bond 
A) Bond should trade for $900 
B) Bond should trade for $1,000 
C) Bond should trade for $1,100 
D) Firm will have already converted the bond

Question 14

Which of the following option traders receive, rather than pay, a premium?

Accepted Answer

A) Option sellers 
B) Option buyers 
C) Both option sellers and buyers 
D) Neither buyers nor sellers receive premiums 
A) Option sellers 
B) Option buyers 
C) Both option sellers and buyers 
D) Neither buyers nor sellers receive premiums

Question 15

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 16

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 17

How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?

Accepted Answer

A) $46 
B) $50 
C) $52 
D) $54 profit from call = stock value - exercise price - premium
0 = stock value - 50 - 4 
A) $46 
B) $50 
C) $52 
D) $54 profit from call = stock value - exercise price - premium
0 = stock value - 50 - 4

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

Which of the following call options would command the higher premium, other things equal?

Accepted Answer

A) October 1996 expiration, $45 strike price 
B) December 1996 expiration, $40 strike price 
C) March 1997 expiration, $45 strike price 
D) June 1997 expiration, $40 strike price 
A) October 1996 expiration, $45 strike price 
B) December 1996 expiration, $40 strike price 
C) March 1997 expiration, $45 strike price 
D) June 1997 expiration, $40 strike price

Exam 25: Conclusion

Why would bondholders be willing to pay more for bonds that contain warrants?

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

Which of the following statements is correct concerning call options?

Stock price volatility is beneficial to option holders.

Which of the following is correct for the owner of a June call, valued at $3, on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

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:

Callable bonds give the option to the issuing firm and hence reduce the value of the bond.

Warrants are call options on a company's stock issued by an organized stock exchange.

Which graph represents a selling a put option?

Under what circumstance will the buyer of a put option be asked to perform his or her obligation?

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

Stock options have been traded on exchanges since:

If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is currently selling for $22 per share, then the:

Which of the following option traders receive, rather than pay, a premium?

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

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.

How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4?

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

Corporations that attach warrants to their bonds are hoping to:

Which of the following call options would command the higher premium, other things equal?

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 Policy

Payout Policy

Long-Term Financial Planning

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Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

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