Question 1

The conversion ratio for a convertible bond equals the:

Accepted Answer

A)  number of interest payments that must be received prior to 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)  number of interest payments that must be received prior to 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 2

If you feel strongly that a stock price will move a lot,but are unsure of the direction,you could:

Accepted Answer

A)  buy both a put and a call. 
B)  sell both a put and a call. 
C)  buy a put and sell a call. 
D)  buy two puts. 
A)  buy both a put and a call. 
B)  sell both a put and a call. 
C)  buy a put and sell a call. 
D)  buy two puts.

Question 3

A put and a call both have the same maturity and both have an exercise price which is equal to the current stock price.The interest rate is 5%.Which option should sell for a higher price?

Accepted Answer

A)  the put. 
B)  both should sell for the same price. 
C)  the call. 
D)  can't say without knowing the variability of the stock. 
A)  the put. 
B)  both should sell for the same price. 
C)  the call. 
D)  can't say without knowing the variability of the stock.

Question 4

Stock price volatility is beneficial to option holders.

Accepted Answer

A) True 
 B)False

Question 5

You purchased a stock and a put option on the stock with an exercise prices of $40 a share.What will be the value of your position when the option expires if the stock price is $28 a share?

Accepted Answer

A)  $40 
B)  $28 
C)  $12 
D)  $32 
A)  $40 
B)  $28 
C)  $12 
D)  $32

Question 6

The value of a call option at expiration will be equal to the maximum of zero or the:

Accepted Answer

A)  stock price. 
B)  exercise price. 
C)  stock price minus the exercise price. 
D)  exercise price minus the stock price. 
A)  stock price. 
B)  exercise price. 
C)  stock price minus the exercise price. 
D)  exercise price minus the stock price.

Question 7

Which one of the following is correct for the owner of a June call on XYZ Corp.with an exercise price of $60? XYZ Corp.currently trades at $55 and the option at $3.

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 8

You own a September put on CBA Corp.with an exercise price of $80.CBA stock currently trades at $80 and the put at $5.Which of the following is definitely true?

Accepted Answer

A)  The option will continue to gain value until its September expiration. 
B)  The owner should exercise now in order to avoid further losses. 
C)  Decreases in the CBA stock price will be translated directly into additional option value. 
D)  $20 is the maximum value for this option. 
A)  The option will continue to gain value until its September expiration. 
B)  The owner should exercise now in order to avoid further losses. 
C)  Decreases in the CBA stock price will be translated directly into additional option value. 
D)  $20 is the maximum value for this option.

Question 9

The maximum possible payoff to the owner of a put options is:

Accepted Answer

A)  the stock price. 
B)  the exercise price minus the stock price. 
C)  the option's exercise price. 
D)  there is no maximum. 
A)  the stock price. 
B)  the exercise price minus the stock price. 
C)  the option's exercise price. 
D)  there is no maximum.

Question 10

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 11

If a convertible bond can be thought of as a straight bond with a call option,then the call is owned by the _____,and the exercise price is the _____.

Accepted Answer

A)  debt issuer; stock price 
B)  debt issuer; straight bond value 
C)  bond investor; stock price 
D)  bond investor; straight bond value 
A)  debt issuer; stock price 
B)  debt issuer; straight bond value 
C)  bond investor; stock price 
D)  bond investor; straight bond value

Question 12

At what point does the value of a call option lie furthest above its lower bound (that is,the maximum of zero or the stock price − exercise price)?

Accepted Answer

A)  When the stock price is zero. 
B)  When the stock price is very high relative to the exercise price. 
C)  When the stock price equals the exercise price. 
D)  It depends on the maturity of the option. 
A)  When the stock price is zero. 
B)  When the stock price is very high relative to the exercise price. 
C)  When the stock price equals the exercise price. 
D)  It depends on the maturity of the option.

Question 13

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 package. 
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 package. 
D)  make the bond riskier.

Question 14

When the stock price is very high compared with the exercise price,the value of the call option approximates the difference between the stock price and the present value of the exercise price.

Accepted Answer

A) True 
 B)False

Question 15

You purchased a stock for $43 a share,sold a call option with an exercise price of $40,and bought a put option with an exercise price of $45.What will be the value of your position when the options expire if the stock price is $48 a share?

Accepted Answer

A)  $48 
B)  $46 
C)  $56 
D)  $40 
A)  $48 
B)  $46 
C)  $56 
D)  $40

Question 16

What is the option buyer's total profit or loss per share if a call option is purchased for $5,has a $50 exercise price,and the stock is valued at $53 at expiration?

Accepted Answer

A)  −$5 
B)  −$2 
C)  $3 
D)  $8 
A)  −$5 
B)  −$2 
C)  $3 
D)  $8

Question 17

Which one of the following statements is correct for an investor who has purchased portfolio insurance by owning a stock and buying a put option on that stock?

Accepted Answer

A)  The investor profits when the stock price declines. 
B)  Maximum profitability occurs when the stock price equals the exercise price. 
C)  The value of the position can decline no further than the option's exercise price. 
D)  The option will certainly be exercised. 
A)  The investor profits when the stock price declines. 
B)  Maximum profitability occurs when the stock price equals the exercise price. 
C)  The value of the position can decline no further than the option's exercise price. 
D)  The option will certainly be exercised.

Question 18

The floor of a convertible bond is the value of the underlying bond.

Accepted Answer

A) True 
 B)False

Question 19

The buyer of a put option has a(n)_____ to sell the underlying asset and the option seller has a(n)____ to buy the underlying asset.

Accepted Answer

A)  obligation; obligation 
B)  obligation; right 
C)  right; right 
D)  right; obligation 
A)  obligation; obligation 
B)  obligation; right 
C)  right; right 
D)  right; obligation

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 23: Options

The conversion ratio for a convertible bond equals the:

If you feel strongly that a stock price will move a lot,but are unsure of the direction,you could:

A put and a call both have the same maturity and both have an exercise price which is equal to the current stock price.The interest rate is 5%.Which option should sell for a higher price?

Stock price volatility is beneficial to option holders.

You purchased a stock and a put option on the stock with an exercise prices of $40 a share.What will be the value of your position when the option expires if the stock price is $28 a share?

The value of a call option at expiration will be equal to the maximum of zero or the:

Which one of the following is correct for the owner of a June call on XYZ Corp.with an exercise price of $60? XYZ Corp.currently trades at $55 and the option at $3.

You own a September put on CBA Corp.with an exercise price of $80.CBA stock currently trades at $80 and the put at $5.Which of the following is definitely true?

The maximum possible payoff to the owner of a put options is:

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

If a convertible bond can be thought of as a straight bond with a call option,then the call is owned by the _____,and the exercise price is the _____.

At what point does the value of a call option lie furthest above its lower bound (that is,the maximum of zero or the stock price − exercise price)?

Adding warrants as a "sweetener" to bonds will:

When the stock price is very high compared with the exercise price,the value of the call option approximates the difference between the stock price and the present value of the exercise price.

You purchased a stock for $43 a share,sold a call option with an exercise price of $40,and bought a put option with an exercise price of $45.What will be the value of your position when the options expire if the stock price is $48 a share?

What is the option buyer's total profit or loss per share if a call option is purchased for $5,has a $50 exercise price,and the stock is valued at $53 at expiration?

Which one of the following statements is correct for an investor who has purchased portfolio insurance by owning a stock and buying a put option on that stock?

The floor of a convertible bond is the value of the underlying bond.

The buyer of a put option has a(n)_____ to sell the underlying asset and the option seller has a(n)____ to buy the underlying asset.

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

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

International Financial Management

Risk Management

Filters

If a convertible bond can be thought of as a straight bond with a call option,then the call is owned by the _,and the exercise price is the _.

The buyer of a put option has a(n)_ to sell the underlying asset and the option seller has a(n) to buy the underlying asset.