Question 1

Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.

Accepted Answer

A) True 
 B)False

Question 2

What options may be provided in financial securities?

Accepted Answer

Many of the securities that firms issue

Question 3

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit or loss per share if the option is exercised tomorrow?

Accepted Answer

A)  - $16 
B)  - $8 
C)  $8 
D)  $16 
A)  - $16 
B)  - $8 
C)  $8 
D)  $16

Question 4

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

Accepted Answer

A)  - $20 
B)  0 
C)  $10 
D)  $20 
A)  - $20 
B)  0 
C)  $10 
D)  $20

Question 5

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

Accepted Answer

A)  -$14 
B)  -$10 
C)  $10 
D)  $18 
A)  -$14 
B)  -$10 
C)  $10 
D)  $18

Question 6

Which combination of positions will tend to protect the owner from downside risk?

Accepted Answer

A)  Buy the stock and buy a call option. 
B)  Sell the stock and buy a call option. 
C)  Buy the stock and buy a put option. 
D)  Buy the stock and sell a put option. 
A)  Buy the stock and buy a call option. 
B)  Sell the stock and buy a call option. 
C)  Buy the stock and buy a put option. 
D)  Buy the stock and sell a put option.

Question 7

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 8

The conversion ratio for a convertible bond equals the:

Accepted Answer

A)  ratio of bond value to stock price at conversion. 
B)  number of bonds necessary to convert into one share of stock. 
C)  number of shares of stock that can be exchanged for one bond. 
D)  floor value beneath which the bond price cannot fall. 
A)  ratio of bond value to stock price at conversion. 
B)  number of bonds necessary to convert into one share of stock. 
C)  number of shares of stock that can be exchanged for one bond. 
D)  floor value beneath which the bond price cannot fall.

Question 9

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 10

A warrant is a long-term call option that is "in the money" at the time of issuance.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

Accepted Answer

A)  less than $15. 
B)  greater than $15. 
C)  equal to $15. 
D)  zero. 
A)  less than $15. 
B)  greater than $15. 
C)  equal to $15. 
D)  zero.

Question 15

What is the worst-case profitability scenario for an investor who sold a call on the firm's stock for a premium of $10 and a strike price of $100?

Accepted Answer

A)  $90 per share profit 
B)  $10 per share profit 
C)  $0 per share profit (break-even) 
D)  Unlimited losses 
A)  $90 per share profit 
B)  $10 per share profit 
C)  $0 per share profit (break-even) 
D)  Unlimited losses

Question 16

The put option that comes with the puttable bonds makes the bond more valuable.

Accepted Answer

A) True 
 B)False

Question 17

FASB's Statement 123 stipulates that companies must use an option valuation model to estimate the fair value of any option grants and then deduct this value when calculating profits.

Accepted Answer

A) True 
 B)False

Question 18

What is the profit per share for an investor who has purchased a share of stock and two put options with an exercise price of $40,given that the purchase price of the stock was $42,each put cost $2 per share,and the stock was valued at $30 at expiration?

Accepted Answer

A)  -$16 
B)  - $6 
C)  - $4 
D)  $4 
A)  -$16 
B)  - $6 
C)  - $4 
D)  $4

Question 19

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
T

Question 20

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

Exam 23: Options

Unlike call options,the option to abandon a real asset project does not become more valuable as time to expiration increases.

What options may be provided in financial securities?

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit or loss per share if the option is exercised tomorrow?

A stock is currently selling for $70 per share and its call option has a $90 exercise price.What is the lower limit on the value of the call option?

Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for $46 and the premium for the put option was $4.

Which combination of positions will tend to protect the owner from downside risk?

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?

The conversion ratio for a convertible bond equals the:

Adding warrants as a "sweetener" to bonds will:

A warrant is a long-term call option that is "in the money" at the time of issuance.

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

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

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

IBM shares are currently selling at $75.The premium on a call option on IBM shares with an exercise price of $60 will be:

What is the worst-case profitability scenario for an investor who sold a call on the firm's stock for a premium of $10 and a strike price of $100?

The put option that comes with the puttable bonds makes the bond more valuable.

FASB's Statement 123 stipulates that companies must use an option valuation model to estimate the fair value of any option grants and then deduct this value when calculating profits.

What is the profit per share for an investor who has purchased a share of stock and two put options with an exercise price of $40,given that the purchase price of the stock was $42,each put cost $2 per share,and the stock was valued at $30 at expiration?

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.

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

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Risk Management

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