Question 1

The value of an American call option is increased when the variance of the underlying asset increases.

Accepted Answer

A) True 
 B)False

Question 2

Neal owns a convertible bond that matures in four years. The bond has an 8 percent coupon and pays interest annually. The face value of the bond is $1,000 and the conversion price is $21.50. Similar bonds have a market return of 7.5 percent. The current price of the stock is $21.82. What is the conversion value of this bond?

Accepted Answer

A)   $989.00
B)   $1,000.00
C)   $1,003.12
D)   $1,008.16
E)   $1,014.88F) None of the above
G) A) and D)

Question 3

The common stock of Mercury Motors is selling for $43.90 a share. Treasury bills are currently yielding 4.5 percent. What is the current value of a one-year call option on Mercury Motors stock if the exercise price is $37.50 and you assume the option will finish in the money?

Accepted Answer

A)   $6.12
B)   $6.40
C)   $6.69
D)   $7.67
E)   $8.01F) B) and C)
G) D) and E)

Question 4

All else the same, the value of an American call option decreases __________________.

Accepted Answer

A)   with increases in the underlying asset price
B)   with decreases in the exercise price
C)   with decreases in the risk-free interest rate
D)   the less out-of-the-money the option becomes
E)   with increases in the time to expirationF) All of the above
G) B) and C)

Question 5

Which one of the following will decrease the value of a put option?

Accepted Answer

A)   An increase in the price of the stock
B)   An increase in the strike price
C)   An increase in the standard deviation of the return on the stock
D)   A decrease in the risk-free rate of return
E)   An increase in the time to expirationF) B) and E)
G) A) and E)

Question 6

Underlying stock price: 25  What is the time value per share of the March put?

Accepted Answer

A)   $0.00
B)   $1.00
C)   $1.50
D)   $2.00
E)   $4.00F) D) and E)
G) A) and D)

Question 7

A convertible bond has a face value of $1,000 and a conversion price of $35. The bond has a 9 percent coupon and pays interest semi-annually. The bond matures in 7 years. Similar bonds are yielding 8.5 percent. The current price of the stock is $36.30. What is the conversion value of this bond?

Accepted Answer

A)   $989.16
B)   $1,000.00
C)   $1,025.98
D)   $1,037.14
E)   $1,041.07F) C) and D)
G) A) and B)

Question 8

You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:

Accepted Answer

A)   Also finish in the money.
B)   Finish at the money.
C)   Finish out of the money.
D)   Either finish at the money or in the money.
E)   Either finish at the money or out of the money.F) B) and D)
G) B) and C)

Question 9

Provide a definition of a convertible bond.

Accepted Answer

A bond that can be e...

Question 10

A call option can best be defined as:

Accepted Answer

A)   The right to buy an asset at a fixed price during a particular period of time.
B)   The right to sell an asset at a fixed price during a particular period of time.
C)   An option that can be exercised at any time until its expiration date.
D)   An option that can be exercised only on the expiration date.
E)   An option with payoffs in real goods.F) A) and B)
G) D) and E)

Question 11

The value a convertible bond would have if it could not be converted into common stock is called the __________________.

Accepted Answer

A)   Conversion premium.
B)   Straight bond value.
C)   Conversion value.
D)   Conversion price.
E)   Conversion ratio.F) A) and E)
G) D) and E)

Question 12

Underlying stock price: 25  What is the intrinsic value per share of the January call?

Accepted Answer

A)   $0.00
B)   $1.00
C)   $5.00
D)   $6.00
E)   $7.00F) All of the above
G) D) and E)

Question 13

Stock price Is a variables that is included in the Black-Scholes call option pricing formula.

Accepted Answer

A) True 
 B)False

Question 14

Six months ago, you purchased a put option on ACC stock with a strike price of $50 and an option price of $.70. The option expires today when the value of ACC stock is $54.70. Ignoring trading costs and taxes, what is the total profit or loss on this investment?

Accepted Answer

A)   -$540
B)   -$400
C)   -$70
D)   $70
E)   $400F) C) and E)
G) C) and D)

Question 15

Martha B's has total assets of $1,750. These assets are expected to increase in value to either $1,800 or $2,400 by next year. The company has a pure discount bond outstanding with a face value of $2,000. This bond matures in one year. Currently, Treasury bills are yielding 6 percent. What is the value of the equity in this firm?

Accepted Answer

A)   $16.98
B)   $34.59
C)   $36.67
D)   $37.08
E)   $51.89F) B) and E)
G) B) and D)

Question 16

A stock has a call with a strike price of $25 that expires four days from now. The current price of the stock is $23.50. Suppose the expected prices over the next four days are $25.25, $24.50, $25.60, and $24.75, respectively. Which one of the following statements concerning the call is correct? Ignore the cost of the call and all transaction costs.

Accepted Answer

A)   If the call is a European call, the maximum profit to be gained on the call is $1.60.
B)   If the call is an American call, the maximum profit to be gained on the call is $.25.
C)   If the call is a European call, the call will never be exercised.
D)   If the call is a European call, the call will be worth $.25 at expiration.
E)   If the call is an American call, the call will be worth $.25 at expiration.F) None of the above
G) B) and E)

Question 17

A convertible bond should never be worth less than its straight bond value.

Accepted Answer

A) True 
 B)False

Question 18

Buying a put option gives you the right to sell shares.

Accepted Answer

A) True 
 B)False

Question 19

What is the value of a 6-month call with a strike price of $35 given the Black-Scholes Option Pricing Model and the following information?

Accepted Answer

A)   $0
B)   $0.13
C)   $1.06
D)   $1.85
E)   $2.14F) A) and B)
G) D) and E)

Question 20

One year from now, a stock is expected to be priced at either $36 or $49. Currently the stock is selling for $38.20 while Treasury bills are yielding 2.5%. What is the value of a twelve-month call option with an exercise price of $40?

Accepted Answer

A)   $0
B)   $1.44
C)   $2.13
D)   $3.08
E)   $4.45F) B) and C)
G) B) and D)

Exam 25: Options and Corporate Securities

All else the same, the value of an American call option decreases __________________.

Correct Answer
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What is the value of a 6-month call with a strike price of $35 given the Black-Scholes Option Pricing Model and the following information?

Correct Answer
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A convertible bond has a face value of $1,000 and a conversion price of $35. The bond has a 9 percent coupon and pays interest semi-annually. The bond matures in 7 years. Similar bonds are yielding 8.5 percent. The current price of the stock is $36.30. What is the conversion value of this bond?

Correct Answer
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Provide a definition of a convertible bond.

Correct Answer
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A bond that can be e...
View Answer

The common stock of Mercury Motors is selling for $43.90 a share. Treasury bills are currently yielding 4.5 percent. What is the current value of a one-year call option on Mercury Motors stock if the exercise price is $37.50 and you assume the option will finish in the money?

Correct Answer
verified

Six months ago, you purchased a put option on ACC stock with a strike price of $50 and an option price of $.70. The option expires today when the value of ACC stock is $54.70. Ignoring trading costs and taxes, what is the total profit or loss on this investment?

Correct Answer
verified

Correct Answer
verified

Stock price Is a variables that is included in the Black-Scholes call option pricing formula.

Correct Answer
verified

Underlying stock price: 25 What is the intrinsic value per share of the January call?

Correct Answer
verified

Buying a put option gives you the right to sell shares.

Correct Answer
verified

Correct Answer
verified

The value a convertible bond would have if it could not be converted into common stock is called the __________________.

Correct Answer
verified

Underlying stock price: 25 What is the time value per share of the March put?

Correct Answer
verified

One year from now, a stock is expected to be priced at either $36 or $49. Currently the stock is selling for $38.20 while Treasury bills are yielding 2.5%. What is the value of a twelve-month call option with an exercise price of $40?

Correct Answer
verified

A call option can best be defined as:

Correct Answer
verified

A convertible bond should never be worth less than its straight bond value.

Correct Answer
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Correct Answer
verified

Which one of the following will decrease the value of a put option?

Correct Answer
verified

The value of an American call option is increased when the variance of the underlying asset increases.

Correct Answer
verified

You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:

Correct Answer
verified

Exam 25: Options and Corporate Securities

All else the same, the value of an American call option decreases __________________.

Correct AnswerverifiedShow Answer

What is the value of a 6-month call with a strike price of $35 given the Black-Scholes Option Pricing Model and the following information?

Correct AnswerverifiedShow Answer

A convertible bond has a face value of $1,000 and a conversion price of $35. The bond has a 9 percent coupon and pays interest semi-annually. The bond matures in 7 years. Similar bonds are yielding 8.5 percent. The current price of the stock is $36.30. What is the conversion value of this bond?

Correct AnswerverifiedShow Answer

Provide a definition of a convertible bond.

Correct AnswerverifiedA bond that can be e...View AnswerShow Answer

The common stock of Mercury Motors is selling for $43.90 a share. Treasury bills are currently yielding 4.5 percent. What is the current value of a one-year call option on Mercury Motors stock if the exercise price is $37.50 and you assume the option will finish in the money?

Correct AnswerverifiedShow Answer

Six months ago, you purchased a put option on ACC stock with a strike price of $50 and an option price of $.70. The option expires today when the value of ACC stock is $54.70. Ignoring trading costs and taxes, what is the total profit or loss on this investment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stock price Is a variables that is included in the Black-Scholes call option pricing formula.

Correct AnswerverifiedShow Answer

Underlying stock price: 25 What is the intrinsic value per share of the January call?

Correct AnswerverifiedShow Answer

Buying a put option gives you the right to sell shares.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The value a convertible bond would have if it could not be converted into common stock is called the __________________.

Correct AnswerverifiedShow Answer

Underlying stock price: 25 What is the time value per share of the March put?

Correct AnswerverifiedShow Answer

One year from now, a stock is expected to be priced at either $36 or $49. Currently the stock is selling for $38.20 while Treasury bills are yielding 2.5%. What is the value of a twelve-month call option with an exercise price of $40?

Correct AnswerverifiedShow Answer

A call option can best be defined as:

Correct AnswerverifiedShow Answer

A convertible bond should never be worth less than its straight bond value.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following will decrease the value of a put option?

Correct AnswerverifiedShow Answer

The value of an American call option is increased when the variance of the underlying asset increases.

Correct AnswerverifiedShow Answer

You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A bond that can be e...
View Answer

Correct Answer
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Correct Answer
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