Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Corporations that attach warrants to their bonds are hoping to:

Accepted Answer

A)  sell equity without paying flotation costs. 
B)  convert the bonds into stock at a later date. 
C)  reduce the cost of debt by increasing bond prices. 
D)  increase the price of their shares.

Question 3

Jennifer sold a call option on XXX Corp.with an exercise price of $50.The option expires tomorrow and XXX is currently trading at $40.The option premium was $3 per share.What is Jennifer's expected profit <loss> per share at tomorrow's expiration?

Accepted Answer

A)  ($3) 
B)  $3 
C)  $7 
D)  $10

Question 4

Three months back you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92,what is your return on investment?

Accepted Answer

A)  200 percent 
B)  150 percent 
C)  100 percent 
D)  50 percent

Question 5

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

Accepted Answer

A)  borrowing money to buy a put option. 
B)  borrowing money to invest in the stock. 
C)  simultaneously selling a call and buying a put. 
D)  simultaneously buying a share and buying a put.

Question 6

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

Accepted Answer

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

Question 7

The payoffs from investing in options are designed so that:

Accepted Answer

A)  both buyers and sellers can 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)  few buyers or sellers profit; they buy "insurance".

Question 8

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

Accepted Answer

The answer of Why would bondholders be willing to pay...

Question 9

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

Accepted Answer

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

Question 10

Which of the following is correct for the owner of a June call,valued at $3,on XYZ Corp.with a strike price of $60? XYZ Corp.currently trades at $55.

Accepted Answer

A)  XYZ is expected to go to $63 per share. 
B)  The option cannot currently be exercised. 
C)  The option owner's current profit is $3 per share. 
D)  The option may expire without value.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Generalize the formulas for determining the value of the following four option types: buying a call,buying a put,writing a call,writing a put.

Accepted Answer

The answer of Generalize the formulas for determining the value...

Question 13

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

Accepted Answer

A)  The investor profits when the stock price declines. 
B)  Maximum profitability occurs when stock price equals strike price. 
C)  Value per share can decline no further than the strike price less the value of the option premium. 
D)  The option will certainly be exercised.

Question 14

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

Accepted Answer

A)  Interest rates 
B)  Time to maturity 
C)  Exercise price 
D)  Volatility of the stock

Question 15

Which of the following is correct concerning callable bonds?

Accepted Answer

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

Exam 25: Options