Question 1

Standard deviation of the return on a stock Is a variables that is included in the Black-Scholes call option pricing formula.

Accepted Answer

A) True 
 B)False  True

Question 2

Van, Inc. stock is selling for $38 a share. The 6-month 35 call on Van, Inc. stock is selling for $5.97 while the 6-month 35 put is priced at $1.85. What is the continuously compounded risk-free rate of return?

Accepted Answer

A)  6.41 percent 
B)  6.50 percent 
C)  6.57 percent 
D)  6.65 percent 
E)  6.73 percent 
A)  6.41 percent 
B)  6.50 percent 
C)  6.57 percent 
D)  6.65 percent 
E)  6.73 percent B

Question 3

Martin owns 15,000 shares of stock that he wants to sell sometime within the next three months. Shares of this stock are currently selling for $43.24. The stock has been increasing in price but Martin is concerned the price might start to fall. He is not yet willing to sell his shares just in case the price rises some more. To guarantee that he can receive at least $42.50 a share when he does sell, Martin could purchase _____ with a strike price of $42.50.

Accepted Answer

A)  1,500 warrants 
B)  150 calls 
C)  15,000 puts 
D)  1,500 puts 
E)  150 puts 
A)  1,500 warrants 
B)  150 calls 
C)  15,000 puts 
D)  1,500 puts 
E)  150 puts E

Question 4

You own one call option with an exercise price of $55 on Doo Little stock. The stock is currently selling for $55.20 a share but is expected to sell for either $54 or $62 a share in one year. The risk-free rate of return is 3 percent and the inflation rate is 2.5 percent. What is the current option price if the option expires one year from now?

Accepted Answer

A)  $0.55 
B)  $0.79 
C)  $1.67 
D)  $2.43 
E)  $2.72 
A)  $0.55 
B)  $0.79 
C)  $1.67 
D)  $2.43 
E)  $2.72

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Underlying stock price: 25   You want to purchase one February call option contract on the stock. The contract with a $20 exercise price will cost you ________. (Ignore transactions costs.)

Accepted Answer

A)  $100 
B)  $200 
C)  $500 
D)  $600 
E)  $700 
A)  $100 
B)  $200 
C)  $500 
D)  $600 
E)  $700

Question 7

Option Delta can best be defined as:

Accepted Answer

A)  The act of buying or selling the underlying asset via the option contract. 
B)  The fixed price in the option contract at which the holder can buy or sell the underlying asset. Also the exercise price or strike price. 
C)  The last day on which an option can be exercised. 
D)  The change in the stock price divided by the change in the call price. 
E)  A feature included in the terms of a new issue of debt or preferred shares to make the issue more attractive to initial investors. 
A)  The act of buying or selling the underlying asset via the option contract. 
B)  The fixed price in the option contract at which the holder can buy or sell the underlying asset. Also the exercise price or strike price. 
C)  The last day on which an option can be exercised. 
D)  The change in the stock price divided by the change in the call price. 
E)  A feature included in the terms of a new issue of debt or preferred shares to make the issue more attractive to initial investors.

Question 8

A convertible bond has a face value of $1,000 and a conversion price of $22.50. The bond has a 6 percent coupon and pays interest semi-annually. The bond matures in six years. Similar bonds are yielding 9 percent. The current price of the stock is $23.24. What is the straight bond value?

Accepted Answer

A)  $863.22 
B)  $865.42 
C)  $940.91 
D)  $1,000.00 
E)  $1,033.33 
A)  $863.22 
B)  $865.42 
C)  $940.91 
D)  $1,000.00 
E)  $1,033.33

Question 9

An employee stock option gives an employee the right to _____ shares of stock in the company at a _____ price for a fixed period of time.

Accepted Answer

A)  sell; fixed 
B)  sell; variable 
C)  buy; fixed 
D)  buy; variable 
E)  either buy or sell; fixed 
A)  sell; fixed 
B)  sell; variable 
C)  buy; fixed 
D)  buy; variable 
E)  either buy or sell; fixed

Question 10

ESOs generally provide a guarantee that the option will be in the money prior to the expiration date.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The delta of a call option on a firm's assets is.804. This means that a $60,000 project will increase the value of equity by:

Accepted Answer

A)  $11,760. 
B)  $21,336. 
C)  $48,240. 
D)  $74,627. 
E)  $108,240. 
A)  $11,760. 
B)  $21,336. 
C)  $48,240. 
D)  $74,627. 
E)  $108,240.

Question 13

Warrants include an implicit call option.

Accepted Answer

A) True 
 B)False

Question 14

You know for certain that a common share of Mystical Inc., worth $25 today, will be worth $55 one month from now. The stock pays no dividends. Which of the following actions would maximize your return on investment (assuming no transaction costs)?

Accepted Answer

A)  Purchase a call option with a strike price of $55. 
B)  Purchase warrants on the stock (totaling 100 shares) with a strike price of $35. 
C)  Purchase a put option on the stock with a strike price of $30. 
D)  Purchase 100 shares of the stock at the current price of $25 per share. 
E)  Purchase a call option on the stock with a strike price of $25. 
A)  Purchase a call option with a strike price of $55. 
B)  Purchase warrants on the stock (totaling 100 shares) with a strike price of $35. 
C)  Purchase a put option on the stock with a strike price of $30. 
D)  Purchase 100 shares of the stock at the current price of $25 per share. 
E)  Purchase a call option on the stock with a strike price of $25.

Question 15

Lucie wants to have the option to buy 1,000 shares of stock at a set price any time up to a given date. Lucie should purchase:

Accepted Answer

A)  10 calls. 
B)  100 calls. 
C)  1,000 calls. 
D)  100 puts. 
E)  1,000 puts. 
A)  10 calls. 
B)  100 calls. 
C)  1,000 calls. 
D)  100 puts. 
E)  1,000 puts.

Question 16

The ______________ is the current price of common stock multiplied by the number of shares of common stock that will be received upon conversion of a convertible bond.

Accepted Answer

A)  conversion ratio 
B)  conversion price 
C)  conversion value 
D)  conversion premium 
E)  straight bond value 
A)  conversion ratio 
B)  conversion price 
C)  conversion value 
D)  conversion premium 
E)  straight bond value

Question 17

The common stock of New Horizon Homes is selling for $68.70 a share. U.S. Treasury bills are currently yielding 4.65 percent. What is the current value of a one-year call option on this stock if the exercise price is $67.50 and you assume the option will finish in the money?

Accepted Answer

A)  $0 
B)  $1.20 
C)  $3.00 
D)  $4.20 
E)  $5.40 
A)  $0 
B)  $1.20 
C)  $3.00 
D)  $4.20 
E)  $5.40

Question 18

The conversion value of a convertible bond is computed as the:

Accepted Answer

A)  Conversion ratio multiplied by the price of the stock. 
B)  Conversion ratio multiplied by the conversion price. 
C)  Face value of the bond plus the conversion premium. 
D)  Face value of the bond multiplied by (1 + conversion premium). 
E)  Face value of the bond multiplied by (1 + conversion price). 
A)  Conversion ratio multiplied by the price of the stock. 
B)  Conversion ratio multiplied by the conversion price. 
C)  Face value of the bond plus the conversion premium. 
D)  Face value of the bond multiplied by (1 + conversion premium). 
E)  Face value of the bond multiplied by (1 + conversion price).

Question 19

The market price of Jasper, Inc. is quite volatile and uncertainty concerning some merger activity is expected to keep the stock price volatile for the next few weeks. Given this situation, you decide to buy both a one-month put and a one-month call option on this stock with an exercise price of $42.50. You purchased the call at a quoted price of $.45 and the put at a price of $2.25. What will be your total profit or loss on this investment if the stock price is $34.50 on the day the options expire?

Accepted Answer

A)  -$1,070 
B)  -$930 
C)  -$45 
D)  $530 
E)  $575 
A)  -$1,070 
B)  -$930 
C)  -$45 
D)  $530 
E)  $575

Question 20

A $1,000 semi-annual convertible bond has a 4% coupon rate, a conversion ratio of 20, and five years to maturity. The common stock has a market price of $45. The relevant discount rate is 7%. What is the floor value of the convertible bond?

Accepted Answer

A)  $708.92 
B)  $875.25 
C)  $900.00 
D)  $1,000.00 
E)  $1,124.75 
A)  $708.92 
B)  $875.25 
C)  $900.00 
D)  $1,000.00 
E)  $1,124.75

Exam 25: Options and Corporate Securities

Standard deviation of the return on a stock Is a variables that is included in the Black-Scholes call option pricing formula.

Van, Inc. stock is selling for $38 a share. The 6-month 35 call on Van, Inc. stock is selling for $5.97 while the 6-month 35 put is priced at $1.85. What is the continuously compounded risk-free rate of return?

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

Underlying stock price: 25 You want to purchase one February call option contract on the stock. The contract with a $20 exercise price will cost you ________. (Ignore transactions costs.)

Option Delta can best be defined as:

A convertible bond has a face value of $1,000 and a conversion price of $22.50. The bond has a 6 percent coupon and pays interest semi-annually. The bond matures in six years. Similar bonds are yielding 9 percent. The current price of the stock is $23.24. What is the straight bond value?

An employee stock option gives an employee the right to _____ shares of stock in the company at a _____ price for a fixed period of time.

ESOs generally provide a guarantee that the option will be in the money prior to the expiration date.

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

The delta of a call option on a firm's assets is.804. This means that a $60,000 project will increase the value of equity by:

Warrants include an implicit call option.

You know for certain that a common share of Mystical Inc., worth $25 today, will be worth $55 one month from now. The stock pays no dividends. Which of the following actions would maximize your return on investment (assuming no transaction costs)?

Lucie wants to have the option to buy 1,000 shares of stock at a set price any time up to a given date. Lucie should purchase:

The ______________ is the current price of common stock multiplied by the number of shares of common stock that will be received upon conversion of a convertible bond.

The common stock of New Horizon Homes is selling for $68.70 a share. U.S. Treasury bills are currently yielding 4.65 percent. What is the current value of a one-year call option on this stock if the exercise price is $67.50 and you assume the option will finish in the money?

The conversion value of a convertible bond is computed as the:

A $1,000 semi-annual convertible bond has a 4% coupon rate, a conversion ratio of 20, and five years to maturity. The common stock has a market price of $45. The relevant discount rate is 7%. What is the floor value of the convertible bond?

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Behavioural Finance: Implications for Financial Management

Filters

An employee stock option gives an employee the right to _ shares of stock in the company at a _ price for a fixed period of time.