Question 1

To protect their investment, bondholders could _____ with an exercise price equal to the amount of the debt.

Accepted Answer

Purchasing a put option allows bondholders to sell the bond at a predetermined price (the exercise price), which can protect them if the bond's value falls below the amount of the debt. This strategy provides a way to ensure they can recover their investment regardless of market conditions.

Question 2

A warrant:

Accepted Answer

A warrant gives the holder the right to purchase new shares from the issuing company at a specific price before expiration, requiring the firm to issue new shares when exercised.

Question 3

A ____________ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.

Accepted Answer

A put option is a financial contract that gives the holder the right to sell an asset at a predetermined price within a specified time frame, without the obligation to do so. This contrasts with a call option, which provides the right to buy, and futures or forwards, which typically involve an obligation to buy or sell. Swaps involve exchanging cash flows or other financial instruments but do not grant the right to sell an asset at a fixed price.

Question 4

The intrinsic value of a call option is defined as:

Accepted Answer

The intrinsic value of a call option is defined as the maximum of zero and the difference between the stock price (S₀) and the strike price (E), which is represented as max [S₀ - E, 0].

Question 5

The act where an owner of an option buys or sells the underlying asset, as is their right, is called _____________ the option.

Accepted Answer

Exercising an option refers to the act of the option holder choosing to buy or sell the underlying asset at the agreed-upon price within the specified time frame.

Question 6

A ____________ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.

Accepted Answer

A call option is a financial contract that gives the holder the right to buy an asset at a predetermined price within a specific time frame, but does not obligate them to do so.

Question 7

A firm has a zero-coupon bond issue outstanding with a face value of $12 million, a current market value of $8 million, and a maturity date of 5 years. The risk-free rate of return is 4%. The equity in this firm is a:

Accepted Answer

The equity in a leveraged firm can be viewed as a call option on the firm's assets, with the strike price being the face value of the debt. In this case, the strike price is the face value of the zero-coupon bond, which is $12 million.

Question 8

A firm which issues put bonds is agreeing to:

Accepted Answer

A put bond allows the bondholder the option to force the issuer to buy back the bonds at a set price before maturity, essentially allowing the issuer to borrow money with the condition it can be repaid at a predetermined price for a specific period.

Question 9

An option that can only be exercised on the expiration date is called a(n):

Accepted Answer

European-style options can only be exercised at the expiration date, unlike American-style options, which can be exercised at any time before the expiration date.

Question 10

Underlying stock price: 45.80 What option would you buy if you want to have the right to sell 100 shares of Glaxo stock on or before the 3^rdFriday in October for $45 per share?

Accepted Answer

The answer of Underlying stock price: 45.80  What option...

Question 11

The Bentwater Co. just repriced the firm's employee stock options. This action indicates that the:

Accepted Answer

Repricing employee stock options typically indicates that the market value of the stock has declined significantly since the options were originally issued. This is done to provide employees with an incentive to stay with the company and work towards increasing the stock's value, as their original options may be "underwater" (the exercise price is higher than the current market price of the stock).

Question 12

The buyer of a European call option has the:

Accepted Answer

European call options give the holder the right, but not the obligation, to buy an asset at a specified price (the strike price) on the expiration date. Unlike American options, they cannot be exercised before the expiration date.

Question 13

Convertible bonds:

Accepted Answer

Convertible bonds generally provide a call option to the issuer, allowing them to redeem the bonds before maturity, and a conversion option to the bondholder, allowing them to convert the bonds into a predetermined number of shares.

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

Purchasing a call option with a strike price of $25 allows you to buy the stock at $25 and sell it at $55, maximizing your return as the option will be deeply in-the-money.

Question 15

The value of a risk-free bond can be duplicated by combining a risky bond with a _____ option on the assets of the firm with a _______ maturity date and a strike price _____ to the face value of the bond.

Accepted Answer

A risk-free bond's value can be replicated by combining a risky bond with a put option on the firm's assets. The put option should have a matching maturity date and a strike price equal to the face value of the bond. This allows the bondholder to sell the assets for the face value if the firm defaults, effectively making the bond risk-free.

Question 16

Sue just sold 1,500 American calls. This transaction:

Accepted Answer

Selling a call option obligates the seller to sell the underlying asset at the strike price if the option is exercised. Since each option contract typically represents 100 shares, selling 1,500 calls would obligate Sue to sell 150,000 shares (1,500 x 100) if the options are exercised.

Question 17

Angelina sold 100 puts on a stock at a price of $1.20. The strike price is $20 and the underlying security is priced at $21.00. If the option is exercised, Angelina will:

Accepted Answer

Angelina sold puts, meaning she has the obligation to buy the stock at the strike price if the option is exercised. Since the strike price is $20 and she sold 100 contracts (each contract represents 100 shares), she would have to buy 10,000 shares at $20 each, totaling $200,000. She initially received $1.20 per put, or $12,000 in total (100 contracts * 100 shares * $1.20). Therefore, her net cost is $200,000 (cost to buy shares) - $12,000 (received from selling puts) = $188,000.

Question 18

The last day on which an owner of an option can elect to exercise is the ___________ date.

Accepted Answer

The last day on which an owner of an option can elect to exercise it is known as the expiration date.

Question 19

Employee stock options are designed to:

Accepted Answer

Employee stock options align employee goals with shareholder goals by giving employees an incentive to increase the company's stock price, which benefits both the employees (through the value of their options) and the shareholders (through the increased value of their shares).

Question 20

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

Accepted Answer

The equity of a firm can be considered a call option on the firm's assets when the firm is leveraged, meaning it has debt. This is because equity holders have a claim on the assets of the firm only after debt obligations have been met, similar to how a call option gives the holder the right, but not the obligation, to buy an asset at a certain price.

Quiz 25: Options and Corporate Securities

To protect their investment, bondholders could _____ with an exercise price equal to the amount of the debt.

A warrant:

A ____________ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.

The intrinsic value of a call option is defined as:

The act where an owner of an option buys or sells the underlying asset, as is their right, is called _____________ the option.

A ____________ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.

A firm has a zero-coupon bond issue outstanding with a face value of $12 million, a current market value of $8 million, and a maturity date of 5 years. The risk-free rate of return is 4%. The equity in this firm is a:

A firm which issues put bonds is agreeing to:

An option that can only be exercised on the expiration date is called a(n) :

Underlying stock price: 45.80 What option would you buy if you want to have the right to sell 100 shares of Glaxo stock on or before the 3^rdFriday in October for $45 per share?

The Bentwater Co. just repriced the firm's employee stock options. This action indicates that the:

The buyer of a European call option has the:

Convertible bonds:

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) ?

The value of a risk-free bond can be duplicated by combining a risky bond with a _ option on the assets of the firm with a _ maturity date and a strike price ___ to the face value of the bond.

Sue just sold 1,500 American calls. This transaction:

Angelina sold 100 puts on a stock at a price of $1.20. The strike price is $20 and the underlying security is priced at $21.00. If the option is exercised, Angelina will:

The last day on which an owner of an option can elect to exercise is the ___________ date.

Employee stock options are designed to:

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

Quiz 25: Options and Corporate Securities

To protect their investment, bondholders could _____ with an exercise price equal to the amount of the debt.

A warrant:

A ____________ is a derivative security that gives the owner the right, but not the obligation, to sell an asset at a fixed price for a specified period of time.

The intrinsic value of a call option is defined as:

The act where an owner of an option buys or sells the underlying asset, as is their right, is called _____________ the option.

A ____________ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time.

A firm has a zero-coupon bond issue outstanding with a face value of $12 million, a current market value of $8 million, and a maturity date of 5 years. The risk-free rate of return is 4%. The equity in this firm is a:

A firm which issues put bonds is agreeing to:

An option that can only be exercised on the expiration date is called a(n) :

Underlying stock price: 45.80 What option would you buy if you want to have the right to sell 100 shares of Glaxo stock on or before the 3rd Friday in October for $45 per share?

The Bentwater Co. just repriced the firm's employee stock options. This action indicates that the:

The buyer of a European call option has the:

Convertible bonds:

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) ?

The value of a risk-free bond can be duplicated by combining a risky bond with a _____ option on the assets of the firm with a _______ maturity date and a strike price _____ to the face value of the bond.

Sue just sold 1,500 American calls. This transaction:

Angelina sold 100 puts on a stock at a price of $1.20. The strike price is $20 and the underlying security is priced at $21.00. If the option is exercised, Angelina will:

The last day on which an owner of an option can elect to exercise is the ___________ date.

Employee stock options are designed to:

For the equity of a firm to be considered a call option on the firm's assets, the firm must:

Underlying stock price: 45.80 What option would you buy if you want to have the right to sell 100 shares of Glaxo stock on or before the 3^rdFriday in October for $45 per share?

The value of a risk-free bond can be duplicated by combining a risky bond with a _ option on the assets of the firm with a _ maturity date and a strike price ___ to the face value of the bond.