Question 1

How does the price of a put option respond to a exercise price increase?

Accepted Answer

A)  Increases
B)  Decreases
C)  Remains the same
D)  Goes to zeroE) B) and D)
F) B) and C)

Question 2

Calculate the return on exercising a put option that was purchased for $10, with an exercise price of $85.The stock price at expiration is $81.

Accepted Answer

A)  (60%) 
B)  60%
C)  30%
D)  (30%)  Proceeds = exercise price - stock price= 85 - 81 = $4Profits = proceeds - original investment= 4 - 10 = -$6E) B) and D)
F) A) and B)

Question 3

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)  $1,060E) A) and C)
F) None of the above

Question 4

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 optionE) None of the above
F) C) and D)

Question 5

What are the determinants of option values?

Accepted Answer

The value of call options depends on the...

Question 6

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

Accepted Answer

Conversion Value = 15.5 * 70 = $1,085
Th...

Question 7

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

Accepted Answer

A)  Option holders pay no income taxes
B)  Shareholders do not have capped (restricted)  profits
C)  Option holders do not receive dividends
D)  Shareholders cannot sustain lossesE) A) and B)
F) None of the above

Question 8

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 expireE) C) and D)
F) None of the above

Question 9

The holder of a convertible bond is required to convert the bond into stock at maturity.

Accepted Answer

A) True 
 B)False

Question 10

How does the price of a put option respond to an interest rate increase?

Accepted Answer

A)  Increases
B)  Decreases
C)  Remains the same
D)  Goes to zeroE) B) and C)
F) A) and B)

Question 11

How does the price of a put option respond to a stock price increase?

Accepted Answer

A)  Increases
B)  Decreases
C)  Remains the same
D)  Goes to zeroE) B) and C)
F) All of the above

Question 12

Stocks that have more volatile price changes have more valuable call options because call holders:

Accepted Answer

A)  Capture upside potential without downside risk
B)  Realize that volatility decreases the present value of the exercise price
C)  Have too little variability in the exercise price
D)  Have transferred all risk to put holdersE) All of the above
F) B) and C)

Question 13

When the stock price has risen above the exercise price, the value of a call option is equal to the stock price:

Accepted Answer

A)  Less the value of the dividend
B)  Less the value of the option
C)  Less the present value of the exercise price
D)  Less the exercise priceE) A) and D)
F) A) and B)

Question 14

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 equityE) A) and B)
F) All of the above

Question 15

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

Accepted Answer

A) True 
 B)False

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 bondholder 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 optionE) B) and D)
F) A) and C)

Question 17

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 three 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

Valuing the individual components: <img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> To r...

Question 18

Recently you bought a call and a put option on a stock with a common exercise price of $75.The call premium was $5 and the put premium was $3.You will make money from this position if the stock price is:

Accepted Answer

A)  Greater than $75, but less than $78
B)  Greater than $75, but less than $80
C)  Greater than $72, but less than $75
D)  Less than $67, or greater than $83E) B) and C)
F) A) and B)

Question 19

Which graph represents a buying a call option?

Accepted Answer

The answer of Which graph represents a buying a call...

Question 20

Since the value of a straddle position can't be negative, then a straddle is a costless way of profiting from market movements.

Accepted Answer

A) True 
 B)False

Exam 25: Conclusion

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?

Correct Answer
verified

Which graph represents a buying a call option?

Correct Answer
verified

Stocks that have more volatile price changes have more valuable call options because call holders:

Correct Answer
verified

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

Correct Answer
verified
Conversion Value = 15.5 * 70 = $1,085
Th...
View Answer

Since the value of a straddle position can't be negative, then a straddle is a costless way of profiting from market movements.

Correct Answer
verified

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

Correct Answer
verified

How does the price of a put option respond to a stock price increase?

Correct Answer
verified

Investors who hold warrants essentially have a:

Correct Answer
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What are the determinants of option values?

Correct Answer
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The value of call options depends on the...
View Answer

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

Correct Answer
verified

How does the price of a put option respond to an interest rate increase?

Correct Answer
verified

When the stock price has risen above the exercise price, the value of a call option is equal to the stock price:

Correct Answer
verified

Recently you bought a call and a put option on a stock with a common exercise price of $75.The call premium was $5 and the put premium was $3.You will make money from this position if the stock price is:

Correct Answer
verified

How does the price of a put option respond to a exercise price increase?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified
Valuing the individual components: To r...
View Answer

The holder of a convertible bond is required to convert the bond into stock at maturity.

Correct Answer
verified

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

Correct Answer
verified

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

Correct Answer
verified

Calculate the return on exercising a put option that was purchased for $10, with an exercise price of $85.The stock price at expiration is $81.

Correct Answer
verified

Exam 25: Conclusion

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?

Correct AnswerverifiedShow Answer

Which graph represents a buying a call option?

Correct AnswerverifiedShow Answer

Stocks that have more volatile price changes have more valuable call options because call holders:

Correct AnswerverifiedShow Answer

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share.Calculate both the bond value and conversion value.

Correct AnswerverifiedConversion Value = 15.5 * 70 = $1,085Th...View AnswerShow Answer

Since the value of a straddle position can't be negative, then a straddle is a costless way of profiting from market movements.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

How does the price of a put option respond to a stock price increase?

Correct AnswerverifiedShow Answer

Investors who hold warrants essentially have a:

Correct AnswerverifiedShow Answer

What are the determinants of option values?

Correct AnswerverifiedThe value of call options depends on the...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

How does the price of a put option respond to an interest rate increase?

Correct AnswerverifiedShow Answer

When the stock price has risen above the exercise price, the value of a call option is equal to the stock price:

Correct AnswerverifiedShow Answer

Recently you bought a call and a put option on a stock with a common exercise price of $75.The call premium was $5 and the put premium was $3.You will make money from this position if the stock price is:

Correct AnswerverifiedShow Answer

How does the price of a put option respond to a exercise price increase?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedValuing the individual components: To r...View AnswerShow Answer

The holder of a convertible bond is required to convert the bond into stock at maturity.

Correct AnswerverifiedShow Answer

Owning a call option that has a high probability of being exercised is said to be equivalent to owning the stock.In which way is owning a call not equivalent to owning the stock?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Calculate the return on exercising a put option that was purchased for $10, with an exercise price of $85.The stock price at expiration is $81.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
verified
Conversion Value = 15.5 * 70 = $1,085
Th...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
The value of call options depends on the...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Valuing the individual components: To r...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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