Question 1

An increase in which one of the following will reduce the value of a call option?

Accepted Answer

A)  Interest rate 
B)  Time to expiration 
C)  Volatility of stock price 
D)  Exercise price 
A)  Interest rate 
B)  Time to expiration 
C)  Volatility of stock price 
D)  Exercise price D

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

Unlike call options,the option to abandon a real asset can never be more valuable as time to expiration increases.

Accepted Answer

A) True 
 B)False  False

Question 4

A 10-year convertible bond has a face value of $1,000,a 9% coupon,and a conversion ratio of 30.The stock is currently priced at $35.If a comparable straight bond would have a yield of 9%,what is the minimum value of the call option provided by the convertible?

Accepted Answer

A)  $0 
B)  $5 
C)  $50 
D)  $65 
A)  $0 
B)  $5 
C)  $50 
D)  $65

Question 5

A firm is planning to issue a callable bond with a coupon rate of 8% and 10 years to maturity.A straight bond with a similar coupon is priced at $1,000.If the value of the issuer's call option is $60,what is the value of the callable bond?

Accepted Answer

A)  $940 
B)  $970 
C)  $1,000 
D)  $1,060 
A)  $940 
B)  $970 
C)  $1,000 
D)  $1,060

Question 6

At what point is the dollar payoff from owning a call option on a stock greater than the payoff from owning the stock itself?

Accepted Answer

A)  When stock price exceeds exercise price at expiration. 
B)  When exercise price exceeds stock price at expiration. 
C)  When stock price equals exercise price at expiration. 
D)  Call payoff never exceeds stock payoff. 
A)  When stock price exceeds exercise price at expiration. 
B)  When exercise price exceeds stock price at expiration. 
C)  When stock price equals exercise price at expiration. 
D)  Call payoff never exceeds stock payoff.

Question 7

A 10% convertible bond has a conversion ratio of 25.The firm's common stock is currently selling at $35.If the bond is about to mature,what is its value?

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 8

Which combination of positions will 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 9

How much must the stock be worth at expiration in order for the buyer of a call option to break even if the exercise price is $50 and the cost of the call was $4?

Accepted Answer

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

Question 10

Corporations that attach warrants to their bonds are hoping to:

Accepted Answer

A)  repurchase shares of outstanding stock. 
B)  convert the bonds into stock at a later date. 
C)  increase the value of the bonds. 
D)  increase the price of their shares. 
A)  repurchase shares of outstanding stock. 
B)  convert the bonds into stock at a later date. 
C)  increase the value of the bonds. 
D)  increase the price of their shares.

Question 11

Warrants are long-term call options on a company's stock issued by an organized stock exchange.

Accepted Answer

A) True 
 B)False

Question 12

Which one of the following is true for the owner of a call option?

Accepted Answer

A)  The loss potential is unlimited. 
B)  The profit potential is unlimited. 
C)  The option price exceeds the exercise price. 
D)  There is no expiration date, unless the option is a European call. 
A)  The loss potential is unlimited. 
B)  The profit potential is unlimited. 
C)  The option price exceeds the exercise price. 
D)  There is no expiration date, unless the option is a European call.

Question 13

Maria sold a call option on XXX Corp.with an exercise price of $50.The option is about to expire and stock XXX is currently trading at $40.What is the value of Maria's position?

Accepted Answer

A)  −$10 
B)  $0 
C)  $7 
D)  $10 
A)  −$10 
B)  $0 
C)  $7 
D)  $10

Question 14

A strategy of buying the stock and selling the put is called a protective put.

Accepted Answer

A) True 
 B)False

Question 15

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.

Question 16

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 17

The value of a call option increases as the exercise price increases.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

A protective put is a way to eliminate the downside risk of holding stock.

Accepted Answer

A) True 
 B)False

Question 20

An investor purchased a share of stock for $42 and at the same time paid $2 to purchase a put option on the stock with an exercise price of $40.What is her profit if the stock is worth $30 at expiration?

Accepted Answer

A)  $6 
B)  −$6 
C)  −$4 
D)  $4 
A)  $6 
B)  −$6 
C)  −$4 
D)  $4

Exam 23: Options

An increase in which one of the following will reduce the value of a call option?

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

Unlike call options,the option to abandon a real asset can never be more valuable as time to expiration increases.

A 10-year convertible bond has a face value of $1,000,a 9% coupon,and a conversion ratio of 30.The stock is currently priced at $35.If a comparable straight bond would have a yield of 9%,what is the minimum value of the call option provided by the convertible?

A firm is planning to issue a callable bond with a coupon rate of 8% and 10 years to maturity.A straight bond with a similar coupon is priced at $1,000.If the value of the issuer's call option is $60,what is the value of the callable bond?

At what point is the dollar payoff from owning a call option on a stock greater than the payoff from owning the stock itself?

A 10% convertible bond has a conversion ratio of 25.The firm's common stock is currently selling at $35.If the bond is about to mature,what is its value?

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

How much must the stock be worth at expiration in order for the buyer of a call option to break even if the exercise price is $50 and the cost of the call was $4?

Corporations that attach warrants to their bonds are hoping to:

Warrants are long-term call options on a company's stock issued by an organized stock exchange.

Which one of the following is true for the owner of a call option?

Maria sold a call option on XXX Corp.with an exercise price of $50.The option is about to expire and stock XXX is currently trading at $40.What is the value of Maria's position?

A strategy of buying the stock and selling the put is called a protective put.

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:

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

The value of a call option increases as the exercise price increases.

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

A protective put is a way to eliminate the downside risk of holding stock.

An investor purchased a share of stock for $42 and at the same time paid $2 to purchase a put option on the stock with an exercise price of $40.What is her profit if the stock is worth $30 at expiration?

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

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