Question 1

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

Accepted Answer

A) True 
 B)False

Question 2

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 3

The difference between an American call option and a European call option is:

Accepted Answer

A)  the European call has a final exercise date. 
B)  the American call trades only on domestic stocks. 
C)  the European call can be exercised only on one day. 
D)  the American call generates profits regardless of which direction the stock moves. 
A)  the European call has a final exercise date. 
B)  the American call trades only on domestic stocks. 
C)  the European call can be exercised only on one day. 
D)  the American call generates profits regardless of which direction the stock moves.

Question 4

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

Accepted Answer

A)  Buyer of a call option with exercise price of $65 
B)  Buyer of a put option with exercise price of $65 
C)  Buyer of a call option with exercise price of $85 
D)  Buyer of a put option with exercise price of $85 
A)  Buyer of a call option with exercise price of $65 
B)  Buyer of a put option with exercise price of $65 
C)  Buyer of a call option with exercise price of $85 
D)  Buyer of a put option with exercise price of $85

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

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

On March 30 you are holding a call option on a stock (exercise price of $60),which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

Accepted Answer

A)  $1 
B)  - $1 
C)  Very little 
D)  Zero 
A)  $1 
B)  - $1 
C)  Very little 
D)  Zero

Question 9

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 10

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 
A)  $46 
B)  $50 
C)  $52 
D)  $54

Question 11

Why is the value of a call option said to increase as the interest rate increases?

Accepted Answer

A)  The stock seller must pay the call owner more interest. 
B)  The present value of the strike price is reduced. 
C)  As interest rates increase, stock prices increase. 
D)  Interest rate increases reduce the option premium. 
A)  The stock seller must pay the call owner more interest. 
B)  The present value of the strike price is reduced. 
C)  As interest rates increase, stock prices increase. 
D)  Interest rate increases reduce the option premium.

Question 12

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

Accepted Answer

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

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

The probability that all six of an executive's stock-option grants from 1995 to 2002 were dated just before a rise in the stock price (often at the bottom of a steep drop)is as small as 1 in 300 billion.

Accepted Answer

A) True 
 B)False

Question 15

What options may be present in capital investment proposals?

Accepted Answer

The importance of building flexibility i

Question 16

Owning a call option that has a high probability of being exercised is said to be almost 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)  Stockholders do not have capped (restricted) profits. 
C)  Option holders do not receive dividends. 
D)  Stockholders cannot sustain losses. 
A)  Option holders pay no income taxes. 
B)  Stockholders do not have capped (restricted) profits. 
C)  Option holders do not receive dividends. 
D)  Stockholders cannot sustain losses.

Question 17

In 2007 the SEC investigated a number of instances where companies had backdated the stock options that they granted to senior executives.

Accepted Answer

A) True 
 B)False

Question 18

Under what circumstance will the buyer of a put option be asked to perform 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 19

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 20

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share,then:

Accepted Answer

A)  the bond will be converted immediately. 
B)  the bond is violating its "price floor." 
C)  conversion now would give the investor a profit of $900. 
D)  the conversion value of the bond is $900. 
A)  the bond will be converted immediately. 
B)  the bond is violating its "price floor." 
C)  conversion now would give the investor a profit of $900. 
D)  the conversion value of the bond is $900.

Exam 23: Options

A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.

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:

The difference between an American call option and a European call option is:

A stock is selling at $85 at the expiration of an option contract.Which of the following options will most likely be exercised?

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.

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

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

On March 30 you are holding a call option on a stock (exercise price of $60),which will expire on March 31.The closing price of the stock on March 30 is $59.What is the value of your call option?

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

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?

Why is the value of a call option said to increase as the interest rate increases?

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

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:

The probability that all six of an executive's stock-option grants from 1995 to 2002 were dated just before a rise in the stock price (often at the bottom of a steep drop)is as small as 1 in 300 billion.

What options may be present in capital investment proposals?

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

In 2007 the SEC investigated a number of instances where companies had backdated the stock options that they granted to senior executives.

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

Which of the following statements is correct concerning call options?

If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share,then:

Goals and Governance of the Corporation

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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

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Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

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