Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

There are two basic types of options. A

Question 4

Which one of the following call options would command the higher premium, other things equal? (All months are within the same calendar year.)

Accepted Answer

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

Question 5

At expiration a call option will have no value if the stock price is less than exercise price.

Accepted Answer

A) True 
 B)False

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

The value of a call option at expiration will be equal to the maximum of zero or the:

Accepted Answer

A)  stock price. 
B)  exercise price. 
C)  stock price minus the exercise price. 
D) exercise price minus the stock price. 
A)  stock price. 
B)  exercise price. 
C)  stock price minus the exercise price. 
D) exercise price minus the stock price.

Question 8

Executive stock options are issued with the hope that the recipient will:

Accepted Answer

A)  sell the shares they currently own thereby diversifying the firm's ownership. 
B)  work to increase the value of the firm's stock. 
C)  never execute them. 
D) sell their shares at the option's exercise price. 
A)  sell the shares they currently own thereby diversifying the firm's ownership. 
B)  work to increase the value of the firm's stock. 
C)  never execute them. 
D) sell their shares at the option's exercise price.

Question 9

An investor purchased both a put and a call option on a stock with exercise prices of $40 a share. The put cost $1 and the call cost $3. When the options expire the stock price is $43. What is the investor's net profit?

Accepted Answer

A)  -$1 
B)  $0 
C)  $3 
D) $2 
A)  -$1 
B)  $0 
C)  $3 
D) $2

Question 10

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

Accepted Answer

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

Question 11

Adding warrants as a "sweetener" to bonds will:

Accepted Answer

A)  reduce the value of the bond. 
B)  increase the coupon rate of the bond. 
C)  increase the value of the bond. 
D) make the bond riskier. 
A)  reduce the value of the bond. 
B)  increase the coupon rate of the bond. 
C)  increase the value of the bond. 
D) make the bond riskier.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

What is the value of a convertible bond with a conversion ratio of 25, face value of $1,000, coupon rate of 10%, and yield to maturity of 10%? 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 14

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 15

The value of a put at expiration is defined as the:

Accepted Answer

A)  minimum of zero or the stock price minus the exercise price. 
B)  minimum of zero or the exercise price minus the stock price. 
C)  maximum of zero or the stock price minus the exercise price. 
D) maximum of zero or the exercise price minus the stock price. 
A)  minimum of zero or the stock price minus the exercise price. 
B)  minimum of zero or the exercise price minus the stock price. 
C)  maximum of zero or the stock price minus the exercise price. 
D) maximum of zero or the exercise price minus the stock price.

Question 16

At what point on the graph of possible values for a call option does the buyer break even financially?

Accepted Answer

A)  When the stock price equals the strike price 
B)  At any point on the upward-sloping segment of the graph 
C)  When the stock price equals the cost of the option plus the strike price 
D) At the point where the graph intercepts the y-axis 
A)  When the stock price equals the strike price 
B)  At any point on the upward-sloping segment of the graph 
C)  When the stock price equals the cost of the option plus the strike price 
D) At the point where the graph intercepts the y-axis

Question 17

A writer of a call option expects the stock price to:

Accepted Answer

A)  decrease. 
B)  increase. 
C)  split. 
D) produce quarterly cash dividends. 
A)  decrease. 
B)  increase. 
C)  split. 
D) produce quarterly cash dividends.

Question 18

Put-call parity holds only if an investor plans to hold the options to maturity.

Accepted Answer

A) True 
 B)False

Question 19

The buyer of a put option has a(n) _____ to sell the underlying asset and the option seller has a(n) ____ to buy the underlying asset.

Accepted Answer

A)  obligation; obligation 
B)  obligation; right 
C)  right; right 
D) right; obligation 
A)  obligation; obligation 
B)  obligation; right 
C)  right; right 
D) right; obligation

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 23: Options

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

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:

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

Which one of the following call options would command the higher premium, other things equal? (All months are within the same calendar year.)

At expiration a call option will have no value if the stock price is less than exercise price.

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

The value of a call option at expiration will be equal to the maximum of zero or the:

Executive stock options are issued with the hope that the recipient will:

An investor purchased both a put and a call option on a stock with exercise prices of $40 a share. The put cost $1 and the call cost $3. When the options expire the stock price is $43. What is the investor's net profit?

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

Adding warrants as a "sweetener" to bonds will:

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

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

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

The value of a put at expiration is defined as the:

At what point on the graph of possible values for a call option does the buyer break even financially?

A writer of a call option expects the stock price to:

Put-call parity holds only if an investor plans to hold the options to maturity.

The buyer of a put option has a(n) _____ to sell the underlying asset and the option seller has a(n) ____ to buy the underlying asset.

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

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Risk Management

Filters

The buyer of a put option has a(n) _ to sell the underlying asset and the option seller has a(n) to buy the underlying asset.