Question 1

Since the value of a straddle position can't be negative, then a straddle is a costless way of profiting from market movements.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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 4

A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60, what is the value of the callable bond?

Accepted Answer

A) $940 
B) $970 
C) $1,000 
D) $1,060 
A) $940 
B) $970 
C) $1,000 
D) $1,060

Question 5

How does the price of a put option respond to a stock price 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

How does the price of a put option respond to a exercise price 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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

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 11

Calculate the return on exercising a put option that was purchased for $10, with an exercise price of $85.The stock price at expiration is $81.

Accepted Answer

A) (60%) 
B) 60% 
C) 30% 
D) (30%) Proceeds = exercise price - stock price
= 85 - 81 = $4
Profits = proceeds - original investment
= 4 - 10 = -$6 
A) (60%) 
B) 60% 
C) 30% 
D) (30%) Proceeds = exercise price - stock price
= 85 - 81 = $4
Profits = proceeds - original investment
= 4 - 10 = -$6

Question 12

Which graph represents a buying a call option?

Accepted Answer

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

Question 13

What are the determinants of option values?

Accepted Answer

The value of call options depends on the

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

When the stock price has risen above the exercise price, the value of a call option is equal to the stock price:

Accepted Answer

A) Less the value of the dividend 
B) Less the value of the option 
C) Less the present value of the exercise price 
D) Less the exercise price 
A) Less the value of the dividend 
B) Less the value of the option 
C) Less the present value of the exercise price 
D) Less the exercise price

Question 18

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 19

Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10% nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70.Show that it is possible to replicate the stock payoff by borrowing and buying a call option.

Accepted Answer

Valuing the individual components: @#IMG-DLM& To r

Question 20

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

Accepted Answer

A) Option holders pay no income taxes 
B) Shareholders do not have capped (restricted) profits 
C) Option holders do not receive dividends 
D) Shareholders cannot sustain losses 
A) Option holders pay no income taxes 
B) Shareholders do not have capped (restricted) profits 
C) Option holders do not receive dividends 
D) Shareholders cannot sustain losses

Exam 25: Conclusion

Since the value of a straddle position can't be negative, then a straddle is a costless way of profiting from market movements.

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:

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

A firm is planning to issue a callable bond with 8% coupon and 10 years to maturity.A straight bond with similar coupon is priced at $1,000.If the value of the issuer's call option is estimated to be $60, what is the value of the callable bond?

How does the price of a put option respond to a stock price increase?

How does the price of a put option respond to a exercise price increase?

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

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

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

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

Calculate the return on exercising a put option that was purchased for $10, with an exercise price of $85.The stock price at expiration is $81.

Which graph represents a buying a call option?

What are the determinants of option values?

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

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

Investors who hold warrants essentially have a:

When the stock price has risen above the exercise price, the value of a call option is equal to the stock price:

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.

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

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