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Investments & Securities
Q:
call options offer buyers a. potential leverage b. liquidity c. income d. safety of principal
Q:
a call option is similar to a warrant except a. the strike price is fixed b. it may be issued by individual investors c. it is not marketable (saleable) d. it receives dividend payments
Q:
a call is an option to a. sell stock at a specified price b. buy stock at a specified price c. deliver stock at a specified price d. deliver bonds at a specified price
Q:
if an investor constructs a covered call, a. there is no limit to the potential profit b. risk is increased c. risk is reduced d. the term of the position is increased
Q:
the writer of a naked call option wants a. the prices of the stock and the call to rise b. the prices of the stock and the call to fall c. the prices of the stock to fall and the call to rise d. the prices of the stock to rise and the call to remain stable
Q:
a writer of a call option closes the position by a. purchasing the stock b. selling the stock c. purchasing the option d. selling the option
Q:
one reason for writing and selling a covered call option is a. potential leverage b. safety of principal c. income received d. liquidity
Q:
the cboe is 1>a secondary market in put and call options 2>a division of the sec that regulated option trading 3>the first organized options exchange a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
if the price of a stock rises substantially, the investor who wrote a covered call 1>earns a modest profit 2>sustains a modest loss 3>lost an opportunity for a large profit a. 1 and 2 b. 1 and 3 c. 2 and 3 d. only 3
Q:
the value of a put rises as the price of a. stock rises b. a call falls c. stock falls d. a call rises
Q:
a put is an option to a. buy stock b. receive stock c. sell stock d. receive dividends
Q:
stock index options 1>permit the investor to short the market instead of individual stocks 2>require delivery of an index of stocks 3>limit the buyers potential loss to the cost of the option a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
the intrinsic value of a put depends on 1>the strike price 2>the price of the stock 3>the term on the put a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
which of the following is premised on lower stock prices? a. buying a stock index call b. buying a stock index put c. buying a stock and selling a call d. buying a stock and selling a put
Q:
which of the following assumes higher stock prices? 1>buying a stock index call 2>buying a stock index put 3>selling a stock index call 4>selling a stock index put a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
what are the following call options' intrinsic values and time premiums if the price of the underlying stock is $55? option strike price price of the call call at $50 $7.00 call at $55 3.00 call at $60 0.50
Q:
a put and a call have the following terms: call: strike price $50 expiration date six months put: strike price $50 expiration date six months the price of the stock is currently $55. the price of the call and put are, respectively, $9 and $1. what will be the profit from buying the call or buying the put if, after six months, the price of the stock is $40, $50, or $60?
Q:
what are the intrinsic values and time premiums of the following call options if the price of the underlying stock is $35? what are the profits and losses to the buyers and the writers if the stock sells for $31 at the options' expiration? strike price price of the option $30 $7.50 $35 $3.00
Q:
a warrant is the option to buy one share of stock at $40. it expires after one year and currently sells for $10. the price of the stock is $32. a.) what is the maximum possible profit if an investor buys one share of stock and shorts one warrant? b.) what is the range of stock prices that yields a profit on this position?
Q:
given the following information, price of a stock $50 strike price of a six-month call $45 market price of the call $9 finish the following sentences: b. the time premium paid for the call is ________. c. if an investor established a covered call position, the amount invested is _________. d. the most the buyer of the call can lose is ________. e. the maximum amount the seller of the call naked can lose is ________. f. which call is "in" or "out" of the money? after six months (i.e., at the expiration date of the call), the price of the stock is $52. g. the profit (loss) from buying the call is ________. h. the price (loss) from selling the call naked is _______. i. the profit (loss) from selling the call covered is __________. j. the profit (loss) from selling the stock short six months earlier is _________.
Q:
given the following information, price of a stock $39 strike price of a six-month call $35 market price of the call $8 strike price of a six-month put $40 market price of the put $3 finish the following sentences. a. the intrinsic value of the call is _________. b. the intrinsic value of the put is _________. c. the time premium paid for the call is _________. d. the time premium paid for the put is _________. at the expiration of the options (i.e., after six months have lapsed), the price of the stock is $45. e. the profit (loss) from buying the call is _______. f. the profit (loss) from writing the call covered (i.e., buying the stock and selling the call) is ________. g. the profit (loss) from buying the put is _______. h. the profit (loss) from selling the stock short is ______. i. the maximum possible loss from buying the put is ______. j. at expiration, the time premium paid for a put or a call is _______.
Q:
a put is the option to sell stock at $35. the price of the stock is $34, and the price of the put is $2. a. what is the intrinsic value of the put? b. what is the time premium paid for the put? c. what is the percentage return from purchasing the put if at the expiration of the put the price of the stock is $31?
Q:
a three-month call option with a strike price of $30 is currently selling for $4 when the price of the underlying stock is selling for $32. a. what is the call's intrinsic value? b. what is the time premium? c. what is the maximum possible loss to the buyer of the call? d. what is the maximum possible profit to the seller of the option? e. would you buy the call if you expected the price of the stock to fall? three months later the stock is selling for $39. f. what is your profit or loss from buying the stock? g. what is the option's intrinsic value? h. what is your profit or loss from selling the call? i. if you let the option expire, what do you receive? j. what are the percentage returns you earned on investments in the call and in the stock? k. if the price of the stock had been $30 at the option's expiration, what would have been the percentage returns on investments in the call and in the stock? l. what is the primary reason for purchasing a call instead of the underlying stock?
Q:
a firm has both a convertible bond and a convertible preferred stock outstanding. the convertible bond has the following features: coupon 6.5% maturity date 10 years exercise price $20 principal $1,000 call price $1,065. the convertible preferred stock has the following features: annual dividend $2.25 convertible into 2.5 shares of common stock callable at $25 a share. currently the common stock is selling for $13; the yield on nonconvertible bonds is 10%, and the yield on comparable preferred stocks is 14%. what is the value of the above securities in terms of the common stock? what would be the value of each security if it lacked the conversion feature?
Q:
the premium paid over a convertible bond's value as stock tends to fall as the price of the stock rises.
Q:
the premium paid over a convertible bond's value as debt tends to decline as the price of the stock rises.
Q:
if interest rates rise, the value of a convertible bond as debt increases.
Q:
if a convertible bond is called, the bondholder must convert the bond or lose the appreciation achieved by the stock.
Q:
as interest rates increase, the probability that a convertible bond will be called declines.
Q:
as the price of the stock rises, the probability that a convertible bond will be called increases.
Q:
convertible bonds tend to sell for a premium over their value as stock.
Q:
the value of a convertible bond as a debt instrument sets a floor (i.e., the minimum price) for the bond.
Q:
convertible bonds tend to pay more interest than comparable nonconvertible bonds.
Q:
if a $1,000 convertible bond may be converted into 25 shares, the exercise (conversion) price is $40 a share.
Q:
a convertible bond's value fluctuates with the price of the stock into which the bond may be converted.
Q:
if the value of the stock rises, the value of a convertible bond falls.
Q:
convertible bonds are often subordinated to the firm's other debt.
Q:
generally, convertible bonds lack a call provision.
Q:
a convertible bond may be converted at the firm's option into common stock.
Q:
generally a convertible bond lacks a. an indenture b. a call feature c. a strong sinking fund d. a maturity date
Q:
put bonds tend to have lower coupons than bonds that lack the put feature.
Q:
buying a bond with an option to sell the bond back to the firm at par is more speculative than buying a bond that lacks this feature.
Q:
when interest rates rise, the price of a put bond will tend to fluctuate more than a bond without the put option.
Q:
if interest rates fall, the investor will not exercise the option in a put bond.
Q:
a put bond permits the investor to sell the bond back to the issuer at par prior to maturity.
Q:
if the price of common stock falls, the value of a convertible preferred stock will also tend to fall.
Q:
the dividends paid by a convertible preferred stock are treated as a tax-deductible expense to the firm.
Q:
convertible preferred stock generally has a call feature designed to force conversion.
Q:
convertible preferred stock is usually less risky to investors than the firm's convertible bonds.
Q:
convertible preferred stock may be converted into debt.
Q:
the longer it takes to overcome the capital gains advantage to the stock, the less attractive is a convertible bond.
Q:
the potential capital gains from a convertible bond tend to be less than the potential capital gains on the stock into which the bond may be converted.
Q:
the value of a convertible bond as stock depends on the 1> current rate of interest 2> number of shares into which it is convertible 3> price of the stock a. 1 and 2 b. 1 and 3 c. 2 and 3 d. 1, 2, and 3
Q:
convertible bonds sell for a premium over their 1> market price 2> value as stock 3> value as debt a. 1 and 2 b. 1 and 3 c. 2 and 3 d. 1, 2, and 3
Q:
convertible preferred stock 1>pays a fixed dividend 2>pays a variable dividend 3>may be converted into the firm's bonds 4>may be converted into the firm's stock a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
convertible bonds may dilute current stockholders' equity because a. the bonds require interest payments b. the bonds are callable c. dividends to bondholders reduce earnings d. new shares are issued when the bonds are converted
Q:
when a convertible bond is called, 1> interest ceases to accrue 2> the bondholder receives the principal 3> the bondholder generally converts the bond 4> dividends are paid to the bondholder a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
the price of a convertible bond increases when 1> interest rates rise 2> interest rates fall 3> the price of the stock rises 4> the price of the stock falls a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
the value of a convertible bond as debt does not depend on a. the bond's coupon b. the conversion price of the bond c. current interest rates d. the term of the bond
Q:
as the price of common stock rises, a. the value of convertible bonds and convertible preferred stock declines b. the value of convertible bonds falls but convertible stock rises c. the value of convertible bonds rises but convertible preferred stock falls d. the value of convertible bonds and convertible preferred stock rises
Q:
convertible bonds have a call feature to a. protect stockholders from early conversions b. protect bondholders from conversions by stockholders c. force stockholders to convert d. force bondholders to convert
Q:
the price of a convertible bond is often 1> greater than its value as stock 2> less than its value as stock 3> greater than its value as debt 4> less than its value as debt a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
the value of convertible preferred stock depends on 1>the exercise (i.e., conversion) price 2>the number of shares into which the stock may be converted 3>the price of the common stock a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
if an investor expected the firm to grow slowly, which of the following strategies would be best? a. sell the stock short b. buy a convertible bond and short the stock c. buy the stock d. buy the firm's convertible securities
Q:
the interest paid by a convertible bond tends 1>to exceed the firm's common stock dividends 2>to be less than the firm's common stock dividends 3>over time to offset the premium paid for the bond 4>to increase the premium paid for the bond a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
a convertible bond's payback period 1>increases as the bond's coupon increases 2>decreases as the bond's coupon increases 3>increases as the stock's dividend increases 4>decreases as the stock's dividend increases a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
given the information below, answer the following questions. a convertible bond has the following features: principal $1,000 maturity date 20 years interest $80 (8% coupon) call price $1,050 exercise price $65 a share a. the bond may be converted into how many shares? b. if comparable non-convertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt? c. if the stock were selling for $52, what is the value of the bond in terms of stock? d. would you expect the bond to sell for its value as debt (i.e., the value determined in b) if the price of the stock were $52? e. if the price of the bond were $960, what are the premiums paid over the bond's value as stock and its value as debt? f. if the price of the stock were $35, what would be the minimum price of the bond? g. what is the probability that the bond will be called when the price of the stock is $52? h. if the price of the stock rose to $73, what would happen to the price of the bond? i. if the price of the stock were $73, what would the investor receive if the bond were called? j. what will the investor receive when the bond matures?
Q:
a $50 par value convertible preferred stock is convertible into 5 shares (exercise price of $10). the preferred is selling for $75, and the price of the common stock is $1if the price of the common stock rises to $20, what is the minimum percentage price increase the holder of the preferred stock should experience?
Q:
corporation hbm has a convertible bond with the following terms: coupon 5% principal $1,000 maturity 10 years conversion price $50 (20 shares) call price $1,000 + one year's interest the bond's credit rating is bbb, and comparable bbb rated bonds yield 9 percent. the firm's stock is selling for $45 and pays a dividend of $1.50 a share. the convertible bond is selling for $1,000. a. what is the premium paid over the bond's value as stock? b. given the bond's income advantage, how long must the investor hold the bond to overcome the premium over the bond's value as stock? c. if the price of the bond stock to $65, is there any reason to expect the firm to call the bond? d. if the convertible bond is held to maturity, what is the annualized return on an investment in the bond? e. if the price of the stock declines to $25 a share while interest rates on bbb rated bonds rise to 12 percent, what impact does the increase in interest rates have on this convertible bond?
Q:
what is the repayment schedule for the first three years of a $60,000 mortgage loan at 8 percent for twentyfive years? (assume that payments are made annually.)
Q:
a homeowner has been offered three alternative mortgage loans to finance the purchase of a $300,000 house. the interest rate on the first alternative is 8 percent for twentyfive years, and the loan requires a 20 percent down payment. the second mortgage loan is also for twentyfive years with an interest rate of 7 percent but requires a down payment of a third of the cost of the house. the third loan also requires a third down but is for 20 years at 6 percent. what are the annual mortgage payments required by each loan?
Q:
a portfolio manager is considering buying $100,000 worth of treasury bills for $96,211 versus $100,000 worth of commercial paper for $95,897. both securities will mature in nine months. how much additional return will the commercial paper generate over the treasury bills?
Q:
if an investor is in the 28 percent federal income tax bracket, which bond is to be preferred? a. single a, tenyear corporate bond yielding 9.5% b. single a, tenyear municipal bond yielding 7.1%
Q:
what is the value of a $1,000 zero coupon government bond that matures after eight years, if comparable yields are 7%?
Q:
you purchase a three-month discount security (e.g., a treasury bill or commercial paper) for $0.9878 on $1 (i.e., $98,780 for $100,000 face amount). what are the discount yield, the simple annual yield, and the annual compound yield earned by the investment?
Q:
sources of risk to investors in municipal bonds include 1> fluctuations in interest rates 2> reinvestment rate risk 3> default risk a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
general obligation bonds a. illustrative of a revenue bond b. not illustrative of a tax-exempt bond c. are supported by taxing authority d. are secured by property
Q:
if an individual is in the 35 percent income tax bracket and corporate debt yields 7.5 percent, then to be competitive municipal debt must yield at least a. 11.54% b. 7.59% c. 4.88% d. 2.63%
Q:
municipal bonds a. pay more interest than corporate debt b. are exempt from federal income taxation c. are exempt from federal estate taxation d. reduce interest rate risk
Q:
collateralized mortgage obligations (cmos) a. are free of interest rate risk b. have certain repayment schedules c. are not exempt from federal income taxation d. increase in value when interest rates rise