Question 1

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

Accepted Answer

A)   The firm is in poor financial health.
B)   Interest rates have risen substantially since the bond was issued.
C)   Interest rates have fallen substantially since the bond was issued.
D)   The call option is ready to expire. C

Question 2

How,in general,is value derived from options on real assets?

Accepted Answer

When the flexibility is retained in capital budgeting projects to change the scope of the project-whether that means an expansion in the case of a profitable venture or abandonment in the case of a disastrous venture-then the project has an implicit option value.While there was no explicit premium paid,the initial cost of the project may have been enlarged to plan in this degree of flexibility (e.g.,paying higher supplier prices to avoid long-term contracts,or leasing rather than purchasing,etc.).In general,the value of the option is the market value that can either be added to or subtracted from the firm as a result of exercising the option.To clarify the "subtraction" of value from the firm,remember that in the case of abandonment,the project NPV is negative and exercising the option just makes it less negative.

Question 3

Stock options give recipients a right to buy the company stock at a set (exercise)price.The exercise price is usually the stock's 4 p.m.price on the date of the grant,an average of the day's high and low,or the 4 p.m.price the day before.

Accepted Answer

A) True 
 B)False  True

Question 4

The value of a call option increases as the time to expiration increases because:

Accepted Answer

A)   the exercise price continually decreases.
B)   opportunity increases to surpass exercise price.
C)   dividends accumulate while waiting to be paid.
D)   the option can be repeatedly exercised.

Question 5

Only at the expiration date can an investor expect to find the value of call options above their lower bound.

Accepted Answer

A) True 
 B)False

Question 6

For each of the following option and securities combinations show what the payoff would be when the option expires.Assume that each option has the same exercise price and expiration date.
a.Buy a call and invest the present value of the exercise price in a bank deposit
b.Buy a share and a put option on the share
c.Buy a share,buy a put option on the share,and sell a call option on the share
d.Buy a call option and a put option on the share

Accepted Answer

The answer of For each of the following option and...

Question 7

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 8

What price risk is an investor exposed to if he owns a share of stock and has purchased a put option on the stock?

Accepted Answer

The answer of What price risk is an investor exposed...

Question 9

The floor of a convertible bond will be the value of the underlying bond.

Accepted Answer

A) True 
 B)False

Question 10

What is the payoff to buyers and sellers of call and put options?

Accepted Answer

The answer of What is the payoff to buyers and...

Question 11

Which 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 premium exceeds the strike price.
D)   There is no expiration date, unless the option is a European call.

Question 12

Option buyers can have a(n)_____ of exercising their options.Options sellers can have a(n)_____ of exercising their options.

Accepted Answer

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

Question 13

Circular File stock is selling for $25 a share.You see that call options on the stock with exercise price of $20 are selling at $3.What should you do? What will happen to the option price as investors identify this opportunity? Then you observe that put options on Circular File with exercise price $30 are selling for $4.What should you do?

Accepted Answer

The answer of Circular File stock is selling for $25...

Question 14

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 15

Assume that the current stock price is $50 per share,that call options can be purchased with an exercise price of $60 per share,that bank loans can be obtained for a 10% nominal rate,and that at expiration of the option in 3 months,the stock will either be valued at $30 or $70.Show that it is possible to replicate the stock payoff by borrowing and buying a call option.

Accepted Answer

The answer of Assume that the current stock price is...

Question 16

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 conversion value does not have an upper bound.
C)   The conversion ratio may be decreased.
D)   The bond does not have to be given up to exercise the option.

Question 17

A real estate developer buys 70 acres of land in a rural area,planning to build a subdivision on the land if and when the population from the city begins to expand into the area.If population growth is less than anticipated,the developer believes that the land can be sold to a country club that would build a golf course on the property.
a.In what way does the possibility of sale to the country club provide a put option to the developer?
b.What is the exercise price of the option? The asset value?
c.How does the golf course option increase the NPV of the land project to the developer?

Accepted Answer

The answer of A real estate developer buys 70 acres...

Question 18

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

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.

Question 19

What is a callable bond and how is its value determined?

Accepted Answer

The answer of What is a callable bond and how...

Question 20

Stock options have been traded on exchanges since:

Accepted Answer

A)   the founding of the New York Stock Exchange.
B)   options were discovered in 1946.
C)   the early part of the 1970s.
D)   just before the stock market crash in 1987.

Exam 23: Options

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

How,in general,is value derived from options on real assets?

Stock options give recipients a right to buy the company stock at a set (exercise)price.The exercise price is usually the stock's 4 p.m.price on the date of the grant,an average of the day's high and low,or the 4 p.m.price the day before.

The value of a call option increases as the time to expiration increases because:

Only at the expiration date can an investor expect to find the value of call options above their lower bound.

Corporations that attach warrants to their bonds are hoping to:

What price risk is an investor exposed to if he owns a share of stock and has purchased a put option on the stock?

The floor of a convertible bond will be the value of the underlying bond.

What is the payoff to buyers and sellers of call and put options?

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

Option buyers can have a(n) _ of exercising their options.Options sellers can have a(n) _ of exercising their options.

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?

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

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

What is a callable bond and how is its value determined?

Stock options have been traded on exchanges since:

Exam 23: Options

Which of the following conditions will typically be present when a firm calls a bond prior to maturity?

How,in general,is value derived from options on real assets?

Stock options give recipients a right to buy the company stock at a set (exercise)price.The exercise price is usually the stock's 4 p.m.price on the date of the grant,an average of the day's high and low,or the 4 p.m.price the day before.

The value of a call option increases as the time to expiration increases because:

Only at the expiration date can an investor expect to find the value of call options above their lower bound.

Corporations that attach warrants to their bonds are hoping to:

What price risk is an investor exposed to if he owns a share of stock and has purchased a put option on the stock?

The floor of a convertible bond will be the value of the underlying bond.

What is the payoff to buyers and sellers of call and put options?

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

Option buyers can have a(n) _____ of exercising their options.Options sellers can have a(n) _____ of exercising their options.

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?

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

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

What is a callable bond and how is its value determined?

Stock options have been traded on exchanges since:

Option buyers can have a(n) _ of exercising their options.Options sellers can have a(n) _ of exercising their options.