Question 1

What is the minimum value of this bond if the current stock price is $69.50 per share?

Accepted Answer

A)   $778.43
B)   $867.39
C)   $939.00
D)   $1,034.32
E)   $1,070.30F) None of the above
G) A) and B)

Question 2

The ﬁxed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________.

Accepted Answer

A)   opening price
B)   Intrinsic value.
C)   Strike price.
D)   Market price.
E)   Time value.F) A) and C)
G) C) and D)

Question 3

The maximum value of a convertible bond is theoretically:

Accepted Answer

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.F) B) and D)
G) C) and D)

Question 4

A warrant:

Accepted Answer

A)   Is a put option on the assets of a ﬁrm.
B)   Obligates its holder to purchase a stated number of shares of stock at a stated price on or before a stated date.
C)   Requires the ﬁrm to issue new shares of stock when it is exercised.
D)   Is issued by a shareholder.
E)   Generally has a shorter life than either a call option or a put option.F) A) and B)
G) B) and E)

Question 5

What is the value of a 9-month call with a strike price of $50 given the Black-Scholes Option Pricing Model and the following information?

Accepted Answer

A)   $0
B)   $0.26
C)   $1.47
D)   $1.90
E)   $2.59F) None of the above
G) C) and E)

Question 6

You currently own a one-year call option on Way-One, Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4 percent. Your option has a strike price of $20 and you assume
That it will ﬁnish in the money. What is the current value of your call option?

Accepted Answer

A)   $6.25
B)   $6.50
C)   $6.76
D)   $7.13
E)   $7.27F) None of the above
G) A) and E)

Question 7

Consider a ﬁrm that has an issue of convertible bonds outstanding. The bonds have an annual
coupon rate of 8%, a face value of $1,000, and 20 years to maturity. The ﬁrm's stock price was $50
when the bonds were issued and the conversion premium was 20%. The current stock price is $55.
Compute the conversion price, conversion ratio, and conversion value. Also determine the yield on
similar straight bonds at which the conversion value would equal the straight bond value.

Accepted Answer

Conversion price = .250 + 50 =...

Question 8

What are the basic differences between warrants, call options, and convertible bonds?

Accepted Answer

(1) Warrants and convertibles are issued...

Question 9

The value of a put increases as the price of the underlying stock increases.

Accepted Answer

A) True 
 B)False

Question 10

Today, you purchased one share of MULA stock at a market price of $41 a share. You also purchased a one-year 40 put on one share of MULA. The option quote was $.50. What is the
Maximum amount you can lose over the next year?

Accepted Answer

A)   -$2.50
B)   -$2.00
C)   -$1.50
D)   -$1.00
E)   -$.50F) C) and E)
G) A) and D)

Question 11

Provide a deﬁnition of a conversion ratio.

Accepted Answer

The number of shares...

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.F) A) and B)
G) A) and C)

Question 13

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)   $1,124.75F) A) and B)
G) B) and E)

Question 14

Webster United Movers has a $10,000 debt due in six months. If the value of the ﬁrm's assets six months from now is $8,500, the shareholders will in essence:

Accepted Answer

A)   Buy a put on the ﬁrm by paying the debt.
B)   Write a call on the ﬁrm by paying the debt.
C)   Will allow their call option on the ﬁrm to expire.
D)   Will allow their put option on the ﬁrm to expire.
E)   Exercise their call option on the ﬁrm.F) A) and C)
G) D) and E)

Question 15

What was the conversion premium at issuance?

Accepted Answer

A)   16.67%
B)   30.80%
C)   33.33%
D)   38.25%
E)   44.44%F) A) and C)
G) A) and B)

Question 16

You own ﬁve convertible bonds. These bonds have a 6 percent coupon, a $1,000 face value and mature in 9 years. The bonds are convertible into shares of common stock at a conversion price of
$22) 50. How many shares of stock will you receive if you convert all of your bonds?

Accepted Answer

A)   44.44 shares
B)   87.05 shares
C)   145.00 shares
D)   222.22 shares
E)   251.55 sharesF) B) and D)
G) B) and C)

Question 17

The current market value of the assets of Samuelson, Inc. is $91 million. The market value of the equity is $47.63 million. What is the market value of the ﬁrm's debt?

Accepted Answer

A)   $43.37 million
B)   $47.63 million
C)   $102.39 million
D)   $121.39 million
E)   $138.63 millionF) A) and D)
G) C) and D)

Question 18

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) None of the above
G) A) and B)

Question 19

The current market value of the assets of ABC, Inc. is $86 million. The market value of the equity is $43.28 million. What is the market value of the ﬁrm's debt?

Accepted Answer

A)   cannot be determined from the information given
B)   $21.36 million
C)   $42.72 million
D)   $64.08 million
E)   $129.28 millionF) B) and C)
G) A) and C)

Question 20

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?

Accepted Answer

A)   $3.23
B)   $3.40
C)   $3.61
D)   $4.03
E)   $4.22F) None of the above
G) C) and D)

Exam 25: Option Valuation

What was the conversion premium at issuance?

Correct Answer
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The ﬁxed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________.

Correct Answer
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Webster United Movers has a $10,000 debt due in six months. If the value of the ﬁrm's assets six months from now is $8,500, the shareholders will in essence:

Correct Answer
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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:

Correct Answer
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A warrant:

Correct Answer
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What is the value of a 9-month call with a strike price of $50 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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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?

Correct Answer
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Provide a deﬁnition of a conversion ratio.

Correct Answer
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The number of shares...
View Answer

The value of a put increases as the price of the underlying stock increases.

Correct Answer
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What is the value of a 3-month put with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?

Correct Answer
verified

Correct Answer
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Conversion price = .250 + 50 =...
View Answer

The current market value of the assets of ABC, Inc. is $86 million. The market value of the equity is $43.28 million. What is the market value of the ﬁrm's debt?

Correct Answer
verified

You own ﬁve convertible bonds. These bonds have a 6 percent coupon, a $1,000 face value and mature in 9 years. The bonds are convertible into shares of common stock at a conversion price of $22) 50. How many shares of stock will you receive if you convert all of your bonds?

Correct Answer
verified

What is the minimum value of this bond if the current stock price is $69.50 per share?

Correct Answer
verified

The maximum value of a convertible bond is theoretically:

Correct Answer
verified

Today, you purchased one share of MULA stock at a market price of $41 a share. You also purchased a one-year 40 put on one share of MULA. The option quote was $.50. What is the Maximum amount you can lose over the next year?

Correct Answer
verified

The current market value of the assets of Samuelson, Inc. is $91 million. The market value of the equity is $47.63 million. What is the market value of the ﬁrm's debt?

Correct Answer
verified

You currently own a one-year call option on Way-One, Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4 percent. Your option has a strike price of $20 and you assume That it will ﬁnish in the money. What is the current value of your call option?

Correct Answer
verified

What are the basic differences between warrants, call options, and convertible bonds?

Correct Answer
verified
(1) Warrants and convertibles are issued...
View Answer

Exam 25: Option Valuation

What was the conversion premium at issuance?

Correct AnswerverifiedShow Answer

The ﬁxed price in an option contract at which the owner can buy or sell the underlying asset is called the option's _________________.

Correct AnswerverifiedShow Answer

Webster United Movers has a $10,000 debt due in six months. If the value of the ﬁrm's assets six months from now is $8,500, the shareholders will in essence:

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

A warrant:

Correct AnswerverifiedShow Answer

What is the value of a 9-month call with a strike price of $50 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

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?

Correct AnswerverifiedShow Answer

Provide a deﬁnition of a conversion ratio.

Correct AnswerverifiedThe number of shares...View AnswerShow Answer

The value of a put increases as the price of the underlying stock increases.

Correct AnswerverifiedShow Answer

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedConversion price = .250 + 50 =...View AnswerShow Answer

The current market value of the assets of ABC, Inc. is $86 million. The market value of the equity is $43.28 million. What is the market value of the ﬁrm's debt?

Correct AnswerverifiedShow Answer

You own ﬁve convertible bonds. These bonds have a 6 percent coupon, a $1,000 face value and mature in 9 years. The bonds are convertible into shares of common stock at a conversion price of $22) 50. How many shares of stock will you receive if you convert all of your bonds?

Correct AnswerverifiedShow Answer

What is the minimum value of this bond if the current stock price is $69.50 per share?

Correct AnswerverifiedShow Answer

The maximum value of a convertible bond is theoretically:

Correct AnswerverifiedShow Answer

Today, you purchased one share of MULA stock at a market price of $41 a share. You also purchased a one-year 40 put on one share of MULA. The option quote was $.50. What is the Maximum amount you can lose over the next year?

Correct AnswerverifiedShow Answer

The current market value of the assets of Samuelson, Inc. is $91 million. The market value of the equity is $47.63 million. What is the market value of the ﬁrm's debt?

Correct AnswerverifiedShow Answer

You currently own a one-year call option on Way-One, Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4 percent. Your option has a strike price of $20 and you assume That it will ﬁnish in the money. What is the current value of your call option?

Correct AnswerverifiedShow Answer

What are the basic differences between warrants, call options, and convertible bonds?

Correct Answerverified(1) Warrants and convertibles are issued...View AnswerShow Answer

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The number of shares...
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Conversion price = .250 + 50 =...
View Answer

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(1) Warrants and convertibles are issued...
View Answer