Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

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 4

What are the determinants of a call option's value?

Accepted Answer

The value of a call option depends on th

Question 5

What options may be present in capital investment proposals?

Accepted Answer

The importance of building flexibility i

Question 6

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 bond holder 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 bond holder 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 7

It is May 19 and you own a June European call on ABC Corp. with an exercise price of $50. The option trades at $40 and ABC is trading at $86. What should you do?

Accepted Answer

A)  Exercise the option now and take the profits. 
B)  Buy more options on ABC Corp. 
C)  Sell your ABC stock before its price declines. 
D) Sit and wait until the June expiration. 
A)  Exercise the option now and take the profits. 
B)  Buy more options on ABC Corp. 
C)  Sell your ABC stock before its price declines. 
D) Sit and wait until the June expiration.

Question 8

Callable bonds allow the investor to redeem the bond at face value or let the bond remain outstanding until maturity.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Which one of the following is true for an investor who purchased a share of stock for $45 and purchased a $45 put option on the stock?

Accepted Answer

A)  The investor profits when the stock decreases in value. 
B)  The maximum loss is the price of the option premium. 
C)  The investor is protected against upside potential. 
D) Increases in the value of the stock will go to the seller of the put. 
A)  The investor profits when the stock decreases in value. 
B)  The maximum loss is the price of the option premium. 
C)  The investor is protected against upside potential. 
D) Increases in the value of the stock will go to the seller of the put.

Question 11

Which one 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 stock will go to $63 per share within the option period. 
B)  The option should be exercised now. 
C)  The option owner's current profit is $3 per share. 
D) The option may expire without value. 
A)  XYZ stock will go to $63 per share within the option period. 
B)  The option should be exercised now. 
C)  The option owner's current profit is $3 per share. 
D) The option may expire without value.

Question 12

It has been determined that 0.5 share of stock should be purchased with borrowed funds to replicate the payoff to one call option. What is the option's strike price if the stock could range in value from $110 to $10 at the expiration of the option?

Accepted Answer

A)  $40 
B)  $50 
C)  $60 
D) $70 
A)  $40 
B)  $50 
C)  $60 
D) $70

Question 13

What options may be provided in financial securities?

Accepted Answer

Many of the securities that firms issue

Question 14

Three months ago you bought a put option with an exercise price of $100 and a premium of $4. If the stock price at expiration of this option is $92, what is your return on investment?

Accepted Answer

A)  -100% 
B)  -50% 
C)  100% 
D) 50% 
A)  -100% 
B)  -50% 
C)  100% 
D) 50%

Question 15

The payoffs from investing in an option contract are designed so that:

Accepted Answer

A)  both the buyer and the seller of the contract will profit. 
B)  the seller's (buyer's) gain is the buyer's (seller's) loss. 
C)  roughly 20% of sellers and 50% of buyers profit. 
D) there are no profits but there are also no losses. 
A)  both the buyer and the seller of the contract will profit. 
B)  the seller's (buyer's) gain is the buyer's (seller's) loss. 
C)  roughly 20% of sellers and 50% of buyers profit. 
D) there are no profits but there are also no losses.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

A call option is worthless if the underlying stock is worthless.

Accepted Answer

A) True 
 B)False

Question 18

Which one of the following statements is correct?

Accepted Answer

A)  A convertible bond will be priced less than a similar callable bond. 
B)  A convertible bond will be priced more than a similar callable bond. 
C)  Similar callable and convertible bonds will have the same price. 
D) Warrants are always priced more than convertible bonds. 
A)  A convertible bond will be priced less than a similar callable bond. 
B)  A convertible bond will be priced more than a similar callable bond. 
C)  Similar callable and convertible bonds will have the same price. 
D) Warrants are always priced more than convertible bonds.

Question 19

Define and briefly explain the relationship between the value of a call option and the following five factors: stock price, exercise price, interest rate, time to expiration, volatility of stock price.

Accepted Answer

a. Stock price-direct relationship; the

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 23: Options

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

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:

Investors who hold warrants essentially have a:

What are the determinants of a call option's value?

What options may be present in capital investment proposals?

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

It is May 19 and you own a June European call on ABC Corp. with an exercise price of $50. The option trades at $40 and ABC is trading at $86. What should you do?

Callable bonds allow the investor to redeem the bond at face value or let the bond remain outstanding until maturity.

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

Which one of the following is true for an investor who purchased a share of stock for $45 and purchased a $45 put option on the stock?

Which one 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.

It has been determined that 0.5 share of stock should be purchased with borrowed funds to replicate the payoff to one call option. What is the option's strike price if the stock could range in value from $110 to $10 at the expiration of the option?

What options may be provided in financial securities?

Three months ago you bought a put option with an exercise price of $100 and a premium of $4. If the stock price at expiration of this option is $92, what is your return on investment?

The payoffs from investing in an option contract are designed so that:

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

A call option is worthless if the underlying stock is worthless.

Which one of the following statements is correct?

Define and briefly explain the relationship between the value of a call option and the following five factors: stock price, exercise price, interest rate, time to expiration, volatility of stock price.

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

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

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