Question 1

The value of a callable bond equals the value of a straight bond:

Accepted Answer

A)  plus the value of the bondholder's call option. 
B)  minus the value of the bondholder's call option. 
C)  plus the value of the issuer's call option. 
D)  minus the value of the issuer's call option. 
A)  plus the value of the bondholder's call option. 
B)  minus the value of the bondholder's call option. 
C)  plus the value of the issuer's call option. 
D)  minus the value of the issuer's call option.

Question 2

Which one of the following call options would command the higher price,other things equal? (All months are within the same calendar year.)

Accepted Answer

A)  October expiration, $45 exercise price 
B)  December expiration, $40 exercise price 
C)  March expiration, $45 exercise price 
D)  June expiration, $40 exercise price 
A)  October expiration, $45 exercise price 
B)  December expiration, $40 exercise price 
C)  March expiration, $45 exercise price 
D)  June expiration, $40 exercise price

Question 3

Which one of the following is true for an investor who purchased a share of stock for $45 and purchased a put option on the stock with an exercise price of $45?

Accepted Answer

A)  The investor profits when the stock decreases in value. 
B)  The minimum payoff on the position is $45. 
C)  The investor is protected against upside potential. 
D)  Increases in the value of the stock will go to the seller of the put. 
A)  The investor profits when the stock decreases in value. 
B)  The minimum payoff on the position is $45. 
C)  The investor is protected against upside potential. 
D)  Increases in the value of the stock will go to the seller of the put.

Question 4

You purchased a call option with an exercise price of $50.If you exercise the option when the stock price is $60,your proceeds will be:

Accepted Answer

A)  $10. 
B)  $0. 
C)  $4. 
D)  $16. 
A)  $10. 
B)  $0. 
C)  $4. 
D)  $16.

Question 5

Which of the following is not a real option?

Accepted Answer

A)  If tanker rates fall, the company can lay up its fleet 
B)  The extra warehouse space allows the company to expand 
C)  The company replaces an ageing machine tool 
D)  If oil prices rise the company can switch to using gas 
A)  If tanker rates fall, the company can lay up its fleet 
B)  The extra warehouse space allows the company to expand 
C)  The company replaces an ageing machine tool 
D)  If oil prices rise the company can switch to using gas

Question 6

Which one of the following option traders receives the price of the option?

Accepted Answer

A)  Option sellers 
B)  Option buyers 
C)  Both option sellers and buyers 
D)  Neither buyers nor sellers receive the price 
A)  Option sellers 
B)  Option buyers 
C)  Both option sellers and buyers 
D)  Neither buyers nor sellers receive the price

Question 7

Why should a convertible bond always be valued at more than its bond value or its conversion value up until maturity?

Accepted Answer

A)  The bond holder is receiving higher interest rates. 
B)  The holder can decide later whether to own the bond or the stock. 
C)  The conversion ratio may be decreased. 
D)  The bond does not have to be given up to exercise the option. 
A)  The bond holder is receiving higher interest rates. 
B)  The holder can decide later whether to own the bond or the stock. 
C)  The conversion ratio may be decreased. 
D)  The bond does not have to be given up to exercise the option.

Question 8

Which one of the following is correct?

Accepted Answer

A)  There is an upper bound on a callable bond's price. 
B)  Callable bond prices are higher than those of comparable straight bonds. 
C)  The attraction of callable bonds to the issuer increases as interest rates increase. 
D)  The investor in a callable bond owns the call option. 
A)  There is an upper bound on a callable bond's price. 
B)  Callable bond prices are higher than those of comparable straight bonds. 
C)  The attraction of callable bonds to the issuer increases as interest rates increase. 
D)  The investor in a callable bond owns the call option.

Question 9

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 at least $900. 
B)  bond should trade for at least $1,000. 
C)  bond should trade for at least $1,100. 
D)  firm will have already converted the bond. 
A)  bond should trade for at least $900. 
B)  bond should trade for at least $1,000. 
C)  bond should trade for at least $1,100. 
D)  firm will have already converted the bond.

Question 10

You purchased a stock for $36 a share,a call option with an exercise price of $35,and a put option with an exercise price of $34.What will be the value of your position when the options expire if the stock price is $37?

Accepted Answer

A)  $39 
B)  $37 
C)  $40 
D)  $2 
A)  $39 
B)  $37 
C)  $40 
D)  $2

Question 11

The value of both call and put options increases as the variability of the stock price decreases.

Accepted Answer

A) True 
 B)False

Question 12

A share of stock is currently priced at $20 and will change with equal likelihood to either $40 or $10.A call option with a $20 exercise price is available on the stock.The interest rate is zero.Which of the following positions will provide (approximately)the same payoffs as the option?

Accepted Answer

A)  Buy 0.667 shares and lend $6.67 
B)  Buy 0.667 shares and borrow $6.67 
C)  Buy 0.5 shares 
D)  Sell 0.667 shares and borrow $0.667 
A)  Buy 0.667 shares and lend $6.67 
B)  Buy 0.667 shares and borrow $6.67 
C)  Buy 0.5 shares 
D)  Sell 0.667 shares and borrow $0.667

Question 13

Callable bonds give the call option to the issuing firm and hence reduce the value of the bond.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

What is the difference between an American call option and a European call option?

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 16

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

Accepted Answer

A) True 
 B)False

Question 17

The payoffs from investing in an option contract are designed so that:

Accepted Answer

A)  both the buyer and the seller of the contract will profit. 
B)  the seller's (buyer's) gain is the buyer's (seller's) loss. 
C)  roughly 20% of sellers and 50% of buyers profit. 
D)  there are no profits but there are also no losses. 
A)  both the buyer and the seller of the contract will profit. 
B)  the seller's (buyer's) gain is the buyer's (seller's) loss. 
C)  roughly 20% of sellers and 50% of buyers profit. 
D)  there are no profits but there are also no losses.

Question 18

Investors who hold warrants essentially have a:

Accepted Answer

A)  put option on the firm's bonds. 
B)  put option on the firm's equity. 
C)  call option on the firm's bonds. 
D)  call option on the firm's equity. 
A)  put option on the firm's bonds. 
B)  put option on the firm's equity. 
C)  call option on the firm's bonds. 
D)  call option on the firm's equity.

Question 19

Under what circumstance will the buyer of a put option need to fulfill her obligation?

Accepted Answer

A)  When the stock price has declined below the exercise price. 
B)  When the stock price has increased above the exercise price. 
C)  The put buyer has an equal obligation regardless of the relationship between stock and exercise prices. 
D)  The put buyer has no obligation. 
A)  When the stock price has declined below the exercise price. 
B)  When the stock price has increased above the exercise price. 
C)  The put buyer has an equal obligation regardless of the relationship between stock and exercise prices. 
D)  The put buyer has no obligation.

Exam 23: Options

The value of a callable bond equals the value of a straight bond:

Which one of the following call options would command the higher price,other things equal? (All months are within the same calendar year.)

Which one of the following is true for an investor who purchased a share of stock for $45 and purchased a put option on the stock with an exercise price of $45?

You purchased a call option with an exercise price of $50.If you exercise the option when the stock price is $60,your proceeds will be:

Which of the following is not a real option?

Which one of the following option traders receives the price of the option?

Why should a convertible bond always be valued at more than its bond value or its conversion value up until maturity?

Which one of the following is correct?

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:

You purchased a stock for $36 a share,a call option with an exercise price of $35,and a put option with an exercise price of $34.What will be the value of your position when the options expire if the stock price is $37?

The value of both call and put options increases as the variability of the stock price decreases.

A share of stock is currently priced at $20 and will change with equal likelihood to either $40 or $10.A call option with a $20 exercise price is available on the stock.The interest rate is zero.Which of the following positions will provide (approximately)the same payoffs as the option?

Callable bonds give the call option to the issuing firm and hence reduce the value of the bond.

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

What is the difference between an American call option and a European call option?

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

The payoffs from investing in an option contract are designed so that:

Investors who hold warrants essentially have a:

Under what circumstance will the buyer of a put option need to fulfill her obligation?

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Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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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

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