Exam 23: Options

A 10-year maturity convertible bond with a 6% coupon on a company with a bond rating of Aaa is selling for $1,050.Each bond can be exchanged for 20 shares,and the stock price currently is $50 per share.Other Aaa-rated bonds with the same maturity would sell at a yield to maturity of 8%.What is the value of the bondholders' call option? Why is the bond selling for more than the value of the shares it can be converted into?

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

Which of the following is correct concerning callable bonds?

A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):

A share of stock is currently priced at $20 and will change with equal likelihood to either $50 or $10.A call option with a $25 exercise price is available on the stock.How many shares of stock must be purchased to replicate the payoff from owning one call option?

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

Stock price volatility is beneficial to option holders.

An investor who is buying a put option is expecting:

What are the determinants of option values?

The payoffs from holding a call option can be replicated by:

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

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

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 of the following is true for an investor who owns a share of stock and has purchased a put option on the stock?

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

A decrease in which of the following terms will cause an increase in the call value of an option?

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?

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

Assume that a share of stock is currently selling for $80,that a call option can be purchased for an $8 premium and an exercise price of $80,and that a put option can be purchased for a $4 premium and an exercise price of $80.If the investor buys one share,one call,and one put option,what type of price movements will be desirable? Illustrate the investor's potential profits.

When does a change in the value of a call option come the closest to matching the price change in a share of stock?