Q&A Hero

Q: The value of an option is equal to the: A) intrinsic value minus the time premium. B) time premium plus the intrinsic value. C) implied standard deviation plus the intrinsic value. D) summation of the intrinsic value, the time premium, and the implied standard deviation. E) summation of delta, theta, vega, and rho.

Q: The implied standard deviation used in the Black-Scholes option pricing model is: A) based on historical performance. B) a prediction of the volatility of the return on the underlying asset over the life of the option. C) a measure of the time decay of an option. D) an estimate of the future value of an option given a strike price e. E) a measure of the historical intrinsic value of an option.

Q: Which one of the following statements related to the implied standard deviation (ISD) is correct? A) The ISD is an estimate of the historical standard deviation of the underlying security. B) ISD is equal to (1 − d1). C) The ISD estimates the volatility of an option's price over the option's lifespan. D) The value of ISD is dependent upon both the risk-free rate and the time to option expiration. E) ISD confirms the observable volatility of the return on the underlying security.

Q: Which one of the five factors included in the Black-Scholes option pricing model cannot be directly observed? A) Risk-free rate B) Strike price C) Standard deviation D) Stock price E) Life of the option

Q: A decrease in which of the following will increase the value of a put option on a stock? A) Strike price and standard deviation of the returns on the underlying stock B) Stock price and risk-free rate C) Time to expiration and strike price D) Risk-free rate and standard deviation of the returns on the underlying stock E) Time to expiration and stock price

Q: Which one of the following statements is correct? A) The value of a call option decreases as the time to expiration increases. B) A decrease in the risk-free rate decreases the value of a put option. C) Increasing the risk-free rate decreases the value of a call option. D) The value of a put option increases when the standard deviation of the returns on the underlying stock increase. E) Increasing the strike price decreases the value of a put option.

Q: Selling a call option is generally more valuable than exercising the option because of the option's: A) riskless value. B) intrinsic value. C) standard deviation. D) exercise price. E) time premium.

Q: Theta measures an option's: A) intrinsic value. B) volatility. C) rate of time decay. D) sensitivity to changes in the value of the underlying asset. E) sensitivity to changes in the risk-free rate.

Q: Which one of the following statements is correct? A) Increasing the time to maturity may not increase the value of a European put. B) An increase in time decreases the value of a call option. C) Exercising an American option is always more valuable than selling the option. D) Call options tend to be less sensitive to the passage of time than are put options. E) Vega measures the sensitivity of an option's value to the passage of time.

Q: If the price of the underlying stock decreases, then the value of the call options ________ and the value of the put options ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; remain unchanged

Q: Given a small change in the value of the underlying stock, the change in an option's price is approximately equal to the change in stock value: A) divided by delta. B) divided by (1 − Delta). C) divided by (1 + Delta). D) multiplied by (1 − Delta). E) multiplied by delta.

Q: The value of a call option delta is best defined as a value that is: A) between zero and one. B) less than zero. C) greater than zero. D) greater than or equal to zero. E) less than or equal to zero.

Q: The estimate of the future volatility of the returns on the underlying asset that is computed using the Black-Scholes option pricing model is referred to as the: A) residual error. B) implied mean return. C) derived case volatility. D) forecast rho. E) implied standard deviation.

Q: Assume the risk-free rate increases. This change will ________ the value of call options and ________ the value of put options on shares of stock. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) not affect; not affect

Q: Assume the standard deviation of the returns on ABC stock increases. This change will ________ the value of the call options and ________ the value of the put options on ABC stock. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) not effect; not effect

Q: Which one of the following defines the relationship between the value of an option and the option's time to expiration? A) Theta B) Vega C) Rho D) Delta E) Gamma

Q: Assume the risk-free rate increases by one percent. Which one of the following measures the effect this change will have on the value of a firm's stock options? A) Theta B) Vega C) Delta D) Rho E) Gamma

Q: Assume all stocks are non-dividend paying. Given this assumption, which one of these statements is correct regarding stock options? A) European put options are more valuable than comparable American put options. B) Exercising a well-into-the-money American put option is generally not a good idea. C) It is never optimal to exercise an American call option early. D) You should wait to exercise a put option if the stock price falls to zero. E) You are better off exercising an in-the-money call option than selling it.

Q: Which one of the following statements related to options is correct? A) American stock options can be exercised but not resold. B) A European call is either equal to or less valuable than a comparable American call. C) European puts can be resold but can never be exercised. D) European options can be exercised on any dividend payment date. E) American options are valued using the Black-Scholes option pricing model.

Q: When computing the value of a call option using the Black-Scholes option pricing model, d2is calculated as: A) σt .5− 1. B) 1 − σt .5. C) d1− σt .5. D) 1 + σt .5. E) d1+ σt .5.

Q: A bond with five detachable warrants has just been offered for sale for $1,000. The bond matures in eight years and has an annual coupon of $60. Each warrant grants its owner the right to purchase two shares of stock in the company at $15 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 6.4 percent. What is the value of one warrant? A) $2.45 B) $5.67 C) $12.25 D) $24.45 E) $4.89

Q: A $1,000 convertible debenture has a conversion price of $75 per share, an annual coupon payment of $55, and a related stock price of $72.40 a share. What is the conversion value of this bond? A) $1,055.00 B) $1,052.40 C) $1,000.00 D) $965.33 E) $992.68

Q: Lucinda owns a $1,000 face value convertible bond that matures in six years, has a coupon rate of 6.5 percent, paid annually, and a conversion price of $17.50. Similar bonds have a current market return of 6.35 percent while the related stock is priced at $18.03 per share. What is the conversion value of this bond? A) $1,007.30 B) $1,028.45 C) $996.11 D) $1,030.29 E) $1,000.00

Q: Kurt owns a convertible bond that matures in 16 years. The bond has a coupon rate of 6 percent paid semi-annually, a face value of $1,000 and a conversion price of $25. Similar bonds have a current market return of 5.85 percent. The current price of the related stock is $26.50 per share. What is the straight bond value? A) $1,060.00 B) $1,015.45 C) $972.80 D) $980.78 E) $1,030.00

Q: A convertible bond has a face value of $1,000 and a conversion price of $25. The bond has a coupon rate of 6.5 percent, pays interest semi-annually, and matures in 13 years. Similar bonds are currently yielding 6.8 percent. The current price of the related stock is $25.40 per share. What is the straight bond value? A) $974.38 B) $981.82 C) $1,032.50 D) $1,016.00 E) $1,000.00

Q: A convertible bond has a face value of $5,000, a conversion price of $40, a coupon rate of 6 percent, semi-annual payments, and a maturity of 12 years. Similar bonds are currently yielding 7.5 percent. The current price of the related stock is $38 per share. What is the conversion value of this bond? A) $5,600 B) $5,000 C) $4,750 D) $4,930 E) $5,300

Q: A convertible bond currently sells for $1,125, has a $1,000 face value, pays interest annually, and matures in six years. The bond is convertible into shares of common stock at a conversion price of $20. How many shares of stock will be received if five bonds are converted? A) 225 B) 239 C) 200 D) 250 E) 281

Q: A convertible bond has a face value of $1,000, a market value of $987 and can be converted into 24 shares of stock. What is the conversion price? A) $41.67 B) $44.63 C) $41.43 D) $41.13 E) $44.33

Q: A new 12-year project has estimated sales of 7,500 units per year, an end-of-year net cash flow of $65 per unit, a discount rate of 15.5 percent, and an initial cost of $2.5 million. Sales will be revised upward to 8,200 units if the first year is a success and revised downward to 5,000 units if the first year is not a success. Suppose the scale of the project can be doubled in one year thereby increasing the sales projected to 16,800 units. Naturally, expansion would be desirable only if the project is a success. The project could also be dismantled after the first year and sold for $1,900,000. Assume that success and failure are equally likely. What is the current value of the option to expand? A) $1,074,328 B) $1,183,561 C) $828,406 D) $448,920 E) $1,272,312

Q: A new project is expected to produce sales of 4,800 units per year with a net cash flow of $53 each for the next 20 years. The discount rate is 16 percent and the initial investment is $1,625,000. After the first year, the project can be dismantled and sold for $1,475,000. After the first year, the project should be abandoned if annual sales are expected to be less than which number of units? A) 4,735 units B) 4,160 units C) 4,800 units D) 4,210 units E) 4,440 units

Q: A proposed 4-year project has an initial cost of $236,000, projected sales of 4,500 units a year, a cash flow of $32 a unit, and a discount rate of 11 percent. Assume all operating cash flows occur on the last day of each year. If the project is abandoned after two years, the project's assets can be sold for $150,000. Below what level of annual sales, starting in Year 3, should the project be abandoned? A) 3,119 units B) 2,737 units C) 4,067 units D) 3,516 units E) 3,067 units

Q: Dressler Tech is considering a 3-year project with a discount rate of 15 percent, an initial cost of $95,000, projected sales of 1,300 units on the last day of each year, and a cash flow per unit of $38. The project can be abandoned following the sales on the last day of Year 2 at which time the project's assets could be sold for an estimated $40,000. What is the net present value of this project at Time 0 if the sales forecast for Year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,100 or 1,500 units a year? A) −$13,474 B) −$2,526 C) $19,172 D) $8,192 E) $18,887

Q: Western Industrial Products is considering a project with a life of four years, a discount rate of 14.7 percent, and an initial cost of $268,000. The project is expected to produce sales of 2,100 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon the project after one year at which time the project's assets could be sold for an estimated $225,000. The firm should abandon the project immediately following the sales on the last day of the first year if the expected level of annual sales, starting with Year 2, falls to ________ units or less. Ignore taxes. A) 1,961 units B) 1,667 units C) 1,922 units D) 2,034 units E) 2,100 units

Q: Western Shores is considering a project that has an initial cost today of $12,500. The project has a two-year life with cash inflows of $7,400 a year. Should the firm opt to wait one year to commence this project, the initial cost will increase by 4 percent and the cash inflows will increase to $7,900 a year. What is the value of the option to wait if the applicable discount rate is 9.5 percent? A) $373.63 B) $421.56 C) $303.93 D) $182.67 E) $521.66

Q: You are considering a project that has been assigned a discount rate of 14.3 percent. If you start the project today, you will incur an initial cost of $11,400 and will receive cash inflows of $6,800 a year for two years. If you wait one year to start the project, the initial cost will rise to $12,100 and the cash flows will increase to $7,200 a year for two years. What is the value of the option to wait? A) −$7.63 B) −$9.46 C) −$28.51 D) −$30.49 E) −$33.02

Q: Buckeye Industries has a bond issue with a face value of $20,000 that is coming due in one year. The current value of the firm's assets is $22,200 but these assets are expected to be worth either $18,000 or $26,000 one year from now. The going rate on one-year T-bills is 3.6 percent. What is the current value of the firm's debt? A) $16,601 B) $18,581 C) $19,407 D) $3,619 E) $2,793

Q: RPC's assets are currently worth $2,700. In one year, they will be worth either $2,000 or $3,500. The risk-free interest rate is 3.5 percent. Suppose the firm has an outstanding debt issue with a face value of $2,500. What is the current value of the firm's debt? A) $2,377 B) $2,114 C) $2,188 D) $2,263 E) $2,425

Q: Mountain Top Inn has total assets currently valued at $478,500. These assets are expected to be worth either $440,000 or $490,000 in one year. The company has a pure discount bond outstanding with a face value of $475,000 that matures in one year. Currently, U.S. Treasury bills are yielding 3.4 percent. What is the value of the equity in this firm? A) $13,660 B) $18,975 C) $0 D) $15,890 E) $16,822

Q: Electronic Importers has a pure discount bond with a face value of $30,000 that matures in one year. The risk-free rate of return is 3.8 percent. The assets of the business are expected to be worth either $29,000 or $35,000 in one year. Currently, these assets are worth $28,600. What is the current value of the bond? A) $28,146 B) $29,207 C) $28,222 D) $29,547 E) $28,049

Q: The assets of Uptown Stores are currently worth $346,000. These assets are expected to be worth either $320,000 or $365,000 one year from now. The company has a pure discount bond outstanding with a $350,000 face value and a maturity date of one year. The risk-free rate is 3.9 percent. What is the value of the equity in this firm? A) $9,915 B) $12,671 C) $9,507 D) $11,347 E) $10,015

Q: You own one call option with an exercise price of $27.50 on World Wide Stores stock. The stock is currently selling for $28 a share but is expected to sell for either $26 or $30 a share in one year. The risk-free rate of return is 3.65 percent and the inflation rate is 3.2 percent. What is the current call option price if the option expires one year from now? A) $1.55 B) $1.75 C) $1.37 D) $1.46 E) $1.82

Q: The common stock of Westover Foods is currently priced at $18.70 a share. One year from now, the stock price is expected to be either $16 or $22 a share. The risk-free rate of return is 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $20? A) $0 B) $1.08 C) $2.58 D) $.76 E) $1.93

Q: Suppose the current share price of Dimension stock is $46. One year from now, this stock will sell for either $38 or $52 a share. T-bills currently yield 3.3 percent. What is the per share value of a Dimension call option if the exercise price is $40 per share and the expiration is one year from now? A) $7.90 B) $8.48 C) $12.00 D) $10.39 E) $13.62

Q: The price of TSC stock will be either $42 or $46 at the end of the year. Currently, T-bills yield 4.1 percent and TSC sells for $43 a share. What is the per share value of a one-year TSC call option if the exercise price is $45 per share? A) $.66 B) $.72 C) $0 D) $.81 E) $1.03

Q: Currently, T-bills yield 3.8 percent and MTM stock sells for $38 a share. There is no possibility that the stock will be worth less than $36 per share in one year. What is the value of a call option on this stock if the exercise price is $35 per share? A) $.32 B) $3.45 C) $2.89 D) $4.28 E) $.96

Q: The common stock of Hazelton Refiners is selling for $56.10 a share. U.S. Treasury bills are currently yielding 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $55 and you assume the option will finish in the money? A) $0 B) $3.74 C) $2.57 D) $3.18 E) $2.91

Q: You currently own a one-year call option on RCI stock. The current stock price is $51.20 and the risk-free rate of return is 3.36 percent. Your option has a strike price of $50 and you assume the option will finish in the money. What is the current value of your call option? A) $1.16 B) $1.24 C) $2.83 D) $3.13 E) $2.28

Q: This morning, you purchased a call option on School house Supply Co. stock that expires in one year. The exercise price is $37.50. The current price of the stock is $37.60 and the risk-free rate of return is 3.1 percent. Assume the option will finish in the money. What is the current value of the call option? A) $0 B) $.95 C) $.10 D) $1.23 E) $1.09

Q: Three weeks ago, you purchased a June $47.50 put option on Hi-Tech Metals stock at an option price of $.60 per share. The market price of the stock three weeks ago was $47.20. Today, the stock is selling at $48.10 a share. What is the intrinsic value of your put contract? A) −$240 B) $60 C) −$60 D) $0 E) $240

Q: Last week, you purchased a call option on a stock with a strike price of $35. The stock price was $33.30 and the option price was $.35 at that time. What is the current intrinsic value per share if the stock is now selling at $36.60 a share? A) $1.25 B) $1.95 C) $1.60 D) −$3.30 E) $0

Q: You recently purchased six put option contracts on a stock with an exercise price of $45 and an option premium of $.65. What is the total intrinsic value of these contracts if the stock is currently selling for $46.20 a share? A) −$360 B) −$120 C) $0 D) $420 E) $750

Q: You own five call option contracts on Swift Water Tours stock with a strike price of $25 per share and an option premium of $.45 per share. What is the total intrinsic value of these options today if the stock is currently selling for $25.20 a share? A) $20 B) $45 C) $0 D) $450 E) $100

Q: A November $40 call has a premium of $4.60 a share while the underlying stock is priced at $44.15. What is the intrinsic value of this call? A) $0 B) $1.45 C) $.45 D) $4.15 E) $4.60

Q: You sold two $42.50 put contracts on CTB stock at an option price per share of $1.90. The options were exercised today when the market price was $38.60 a share. What is your net profit on this investment? Ignore transaction costs and taxes. A) −$510 B) −$400 C) $300 D) $850 E) $1,160

Q: Cara wrote a put option contract on EZ stock with an exercise price of $40 per share and an option price of $.65 per share. Today, the contracts expire and the stock is selling for $34.30 a share. What is the net profit on this investment? Ignore trading costs and taxes. A) −$635.00 B) $50.50 C) $635.00 D) $63.50 E) −$505.00

Q: Stu purchased six put options on XY stock with a strike price of $45 and an option price of $2.60 per share. The option expires today when the value of the stock is $41.40 per share. What is the net profit on this investment? Ignore trading costs and taxes. A) −$260 B) −$100 C) $100 D) $600 E) $260

Q: Les sold a one-month European $25 call and a one-month European $25 put on ABC stock. The call price per share is $.70 and the put price per share is $1.80. What will be the net profit on these option positions if the stock price is $23 on the day the options expire? Ignore trading costs and taxes. A) $110 B) −$50 C) −$110 D) $50 E) $20

Q: The market price of NM stock has been volatile recently. Since you think the volatility will continue, you purchase a two-month European NM call option with a strike price of $30 and an option price of $.60. You also purchase a two-month European NM put option with a strike price of $30 and an option price of $1.20. What will be your net profit on these option positions if the stock price is $28 on the day the options expire? Ignore trading costs and taxes. A) −$60 B) $20 C) $0 D) −$20 E) $60

Q: Su Lee wrote three call option contracts with a strike price of $22.50 and an option price of $.55 per share. What is the net profit on this investment if the price of the underlying stock is $22.95 per share on the option expiration date? Ignore trading costs and taxes. A) $10 B) $.30 C) $.10 D) $30 E) $0

Q: Vince sold two $45 call option contracts at a quoted price of $1.15 per share. What is the net profit on this investment if the price of the underlying asset is $48.10 on the option expiration date? Ignore trading costs and taxes. A) −$390 B) −$195 C) $0 D) $115 E) $230

Q: Theresa sold ten call option contracts with a strike price of $25 when the option was quoted at $.55 per share. The options expire today when the value of the underlying stock is $24.10. Ignoring trading costs and taxes, what is the net profit on this investment? A) −$35 B) −$350 C) $0 D) $55 E) $550

Q: Rosa purchased three call option contracts on ABC stock with a strike price of $27.50 when the option was quoted at $1.10 per share. The option expires today when the value of ABC stock is $29.30. Ignoring trading costs and taxes, what is the net profit on this investment? A) $0 B) $210 C) $330 D) $140 E) $70

Q: What is the value of five September $40 call contracts on PTL stock if the option premium quote is $1.35 a share and the stock is selling for $41.30 a share? A) $25.00 B) $650 C) $6.75 D) $1.35 E) $675

Q: QLM stock is currently selling for $28.60 a share. The December 25 call is quoted at $1.15 a share compared to $.05 a share for the December 25 put. What is the cost of two December $25 put option contracts on this stock? A) $.20 B) $.10 C) $5.00 D) $15.00 E) $10.00

Q: When you purchase insurance you are in essence: A) buying a put option. B) selling a put option. C) buying a warrant. D) buying a call option. E) selling a call option.

Q: The value of a convertible bond issued by a firm whose stock price exceeds the bond's conversion price will: A) be equal to the conversion value minus the straight bond value. B) be equal to the face value of the bond multiplied by (1 + Conversion ratio). C) be limited to the maximum straight bond value. D) be equal to the bond's floor value. E) generally exceed both the bond's floor value and its conversion value.

Q: The maximum value of a convertible bond is theoretically: A) equal to the conversion value minus the straight bond value. B) equal to the face value of the bond multiplied by (1 + Conversion price). C) limited to the maximum straight bond value. D) limited by the face value of the bond. E) unlimited.

Q: The conversion value of a convertible bond is equal to which one of the following? A) Conversion ratio(Stock price) B) Conversion ratio(Conversion price) C) Face value/Conversion premium D) Face value(1 + Conversion premium) E) Stock price(1 + Conversion ratio)

Q: Which one of the following statements concerning convertible bonds is false? A) A convertible bond is similar to a bond with a call option. B) A convertible bond should always be worth less than a comparable straight bond. C) New shares of stock are issued when a convertible bond is converted. D) A convertible bond can be redeemed just like a straight bond at maturity. E) A convertible bond can be described as having upside potential with downside protection.

Q: When warrants are exercised, the: A) earnings per share decrease. B) earnings per share remain constant. C) total equity in the firm remains constant. D) total equity in a firm decreases. E) number of bonds outstanding increases.

Q: Which one of the following statements concerning warrants is correct? A) Warrants are similar to put options. B) Warrants generally have very short maturity periods. C) Owning a warrant is the same as selling a call option. D) When a warrant is exercised, the number of outstanding shares increases. E) Shares are transferred from one shareholder to another when a warrant is exercised.

Q: Warrants are: A) generally issued as an attachment to publicly issued bonds. B) excluded from trading on an organized exchange. C) structured as long-term put options. D) issued by individual investors. E) often added as an incentive to a private debt issue.

Q: Brad owns a convertible bond. Which one of the following terms would apply to the value of this bond if he were to convert it into shares of stock today? A) Conversion premium B) Straight bond value C) Conversion value D) Inverted value E) Prescribed value

Q: Latetia owns a convertible bond. Which one of the following terms would describe the value of this bond if it were not convertible? A) Conversion premium B) Straight bond value C) Conversion value D) Inverted value E) Market value

Q: The difference between the conversion price and the current stock price, divided by the current stock price, is called the: A) conversion premium. B) straight bond value. C) conversion value. D) conversion price. E) conversion ratio.

Q: Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB Limited stock. Which one of the following terms refers to these 20 shares? A) Conversion premium B) Straight bond value C) Conversion value D) Conversion price E) Conversion ratio

Q: The dollar amount of a bond's par value that is exchangeable for one share of stock is called the: A) conversion premium. B) par value. C) conversion value. D) conversion price. E) conversion ratio.

Q: Jeff owns a $1,000 face value bond. He can exchange that bond for 25 shares of KNJ stock at any time within the next two years. What type of bond does Jeff own? A) Secured B) Warranted C) Convertible D) Junk E) Callable

Q: Amy is a current shareholder of DJ Industries. She has been given the right to purchase an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right within the next 12 months. What is this security called that Amy has been given? A) Convertible bond B) Warrant C) Straddle D) Spread E) Put

Q: Strategic options are: A) valued the same as financial call options. B) difficult to value. C) valued based on their first year's net income. D) considered useless as they generally have negative NPVs. E) increasingly easy to evaluate and value.