Question 1

The conversion price parity for a convertible bond is defined as
A) Market Price of Convertible Bond / Conversion Ration.
B) Market Price of Convertible Bond * Conversion Ration.
C) Market Price of Convertible Bond - Conversion Ration.
D) Market Price of Convertible Bond + Conversion Ration.
E) None of these are correct.

Accepted Answer

The conversion price parity is the market price of the convertible bond divided by the conversion ratio. Therefore, the correct formula is Market Price of Convertible Bond / Conversion Ratio, which is option A.

Question 2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long strap using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $81.25 loss
B) $1,606.25 gain
C) $1,606.25 loss
D) $268.75 loss
E) $268.75 gain

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 3

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long strip using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $1,668.75 gain
B) $1,700.00 gain
C) $1,700.00 loss
D) $31.25 gain
E) $31.25 loss

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 4

In convertible bonds, the value of the common stock price upon immediate conversion is the
A) put-call parity price.
B) conversion parity price.
C) cash equivalent price.
D) convertible price.
E) redemption price.

Accepted Answer

The value of the common stock price upon immediate conversion is known as the conversion parity price. This is the price at which the bondholder can convert the bond into common stock. The conversion parity price is calculated using a formula that takes into account the current market price of the common stock, the conversion ratio, and the price of the convertible bond. This price represents the fair value for the stock that the bondholder is receiving upon conversion. Choices A, C, D, and E do not accurately describe the value of the common stock price upon immediate conversion.

Question 5

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually, and they mature in 10 years.
-Refer to Exhibit 16.9. Calculate the straight-bond value assuming that bonds of equivalent risk and maturity are yielding 14 percent per year compounded semiannually.
A) $757.37
B) $796.83
C) $841.07
D) $889.82
E) $902.65

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 6

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?
A) $912.50 loss
B) $87.50 gain
C) $87.50 loss
D) $1,000.00 gain
E) $1,000.00 loss

Accepted Answer

A bull money spread involves buying and selling options with different strike prices but the same expiration date. If XYZ is trading at $110 at expiration, the call option with the lower strike price (bought option) will be in the money and worth the difference between the stock price ($110) and the strike price of the bought option. The call option with the higher strike price (sold option) will also be in the money, but its cost will reduce the overall profit. The specific numbers needed to calculate the exact profit are not provided, but among the given options, the one that represents a gain and not a loss, considering the strategy's nature, is a $87.50 gain.

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $1,687.50 loss
B) $3,362.50 loss
C) $3,675.50 gain
D) $13.00 gain
E) $13.00 loss

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long strip using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $256.25 loss
B) $256.25 gain
C) $925.00 loss
D) $668.75 gain
E) $668.75 loss

Accepted Answer

A long strip involves buying one call and two puts. If XYZ is trading at 101 11/16 (or 101.6875), the call option is in-the-money by 6.6875, and the puts are out-of-the-money. The gain from the call is 6.6875, but the cost of the options (premium) must be subtracted, resulting in a net loss of $256.25.

Question 9

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
BioTech Industries has debentures outstanding (par value $1,000) convertible into the company's common stock at $30. The coupon rate is 11 percent payable semiannually, and they mature in 10 years.
-Refer to Exhibit 16.9. Calculate the conversion value of the bond if the stock price is $27.00 per share.
A) $600.00
B) $700.00
C) $800.00
D) $900.00
E) $1,000.00

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 10

All of the following are normal characteristics of a convertible bond, EXCEPT
A) conversion at the option of the issuer.
B) conversion into a fixed number of shares of common stock.
C) a conversion price initially above the market price of the common stock.
D) an interest rate lower than that on straight debentures.
E) subordination.

Accepted Answer

Conversion at the option of the issuer is not a normal characteristic of a convertible bond. The conversion right is typically held by the bondholder, not the issuer. Choices B through E are all normal characteristics of convertible bonds.

Question 11

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long strap using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $37.50 loss
B) $37.50 gain
C) $100.00 loss
D) $100.00 gain
E) $2,437.50 loss

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 12

All of the following are normal characteristics of a convertible bond, EXCEPT
A) conversion at the option of the issuer.
B) conversion into a fixed number of shares of common stock.
C) a conversion price initially above the market price of the common stock.
D) an interest rate lower than that on straight debentures.
E) subordination.

Accepted Answer

Conversion at the option of the issuer is not a normal characteristic of a convertible bond. It is usually at the option of the bondholder, not the issuer. The other characteristics listed, such as conversion into a fixed number of shares of common stock, a conversion price initially above the market price of the common stock, an interest rate lower than that on straight debentures, and subordination, are all commonly associated with convertible bonds.

Question 13

The conversion premium for a convertible bond is calculated as
A) (Market Price + Minimum Value)/Minimum Value.
B) (Market Price/Minimum Value) * Minimum Value.
C) (Market Price + Minimum Value) * Minimum Value.
D) (Market Price - Minimum Value)/Minimum Value.
E) (Market Price * Minimum Value)/Minimum Value.

Accepted Answer

The conversion premium for a convertible bond is calculated as the difference between the market price of the bond and its conversion value, expressed as a percentage of the conversion value. The conversion value is calculated as the bond's par value divided by the conversion ratio, which is the number of shares the bond can be converted into. Therefore, the correct formula for the conversion premium is (Market Price - Conversion Value) / Conversion Value, which can be simplified as (Market Price - Par Value / Conversion Ratio) / (Par Value / Conversion Ratio), or (Market Price - Par Value) / Par Value * Conversion Ratio. Answer D is the only one that correctly matches this formula. Answers A, B, C, and E all contain incorrect or incomplete formulas for the conversion premium.

Question 14

The minimum price of a convertible bond is
A) min (Bond Value, Conversion Value).
B) max (Bond Value, Conversion Value).
C) min (Stock Value, Conversion Value).
D) max (Stock Value, Conversion Value).
E) None of these are correct.

Accepted Answer

The minimum price of a convertible bond is the greater of its bond value or its conversion value, hence the correct answer is "max (Bond Value, Conversion Value)." This ensures that the price of the convertible bond is at least equal to its value as a regular bond or its value if converted into the underlying stock.

Question 15

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $18.75 loss
B) $18.75 gain
C) $1,668.75 gain
D) $1,668.75 loss
E) $1,687.50 loss

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 16

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $106.25 gain
B) $106.25 loss
C) $1,275.00 loss
D) $1,275.00 gain
E) $75.00 loss

Accepted Answer

The answer of USE THE INFORMATION BELOW FOR THE FOLLOWING...

Question 17

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a
A) total return swap.
B) credit default swap.
C) collar.
D) forward rate agreement.
E) swap agreement.

Accepted Answer

The payment of compensation for loss in a credit default swap is triggered by the occurrence of a credit-related event, such as the default or bankruptcy of the reference entity. In other derivatives listed, such as a total return swap or forward rate agreement, the payment structure is based on financial performance or interest rates.

Question 18

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $68.75 loss
B) $68.75 gain
C) $37.50 loss
D) $1,200.00 loss
E) $1,200.00 gain

Accepted Answer

To establish a long straddle, we buy both a call and a put option with the same strike price and expiration date. In this case, we buy the 90 Call and the 90 Put options.

At expiration, if XYZ is still trading at 101 11/16, both options will be in-the-money and will have intrinsic value. The 90 Call will have a value of 11 11/16 (101 11/16 - 90) and the 90 Put will have a value of 0 (since the stock price is above the strike price and there is no benefit to exercising the option).

Thus, the net gain from the long straddle will be the difference between the cost of buying the options and the total value received from exercising them. The cost of buying both options is $250 + $350 = $600. The total value received from exercising the 90 Call is $1,168.75 ($11.6875 x 100 shares) and the total value received from the 90 Put is $0.

Therefore, the net gain is $1,168.75 - $600 = $568.75. However, since we originally paid $637.50 to buy the options, our net loss is $68.75.

Question 19

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $668.75 gain
B) $668.75 loss
C) $94.56 gain
D) $94.56 loss
E) $81.25 loss

Accepted Answer

A long straddle involves buying a call and a put option with the same exercise price and expiration date. In this case, we buy the 95 call and put options. The cost of the options is the sum of their premiums, which is $6.4375 + $2.125 = $8.5625 per share. Since each option contract represents 100 shares, the total cost of the straddle is $856.25.

If XYZ is trading at 101 11/16 at expiration, the call option will be worth $6.5625 per share (101 11/16 - 95) and the put option will be worthless. The total value of the options is therefore $656.25. We subtract the cost of the straddle to get the dollar gain or loss: 
$656.25 - $856.25 = -$200.

So the dollar loss is $200, which is equivalent to $94.56 (rounded to two decimal places) per share. Therefore, the option holder would experience a loss of $94.56.

Question 20

An advantage of convertible bonds is
A) investors get the upside potential of a bond.
B) investors get the upside potential of a stock.
C) issuing firms can get a lower rate of interest on its debt.
D) a and b
E) b and c

Accepted Answer

Convertible bonds offer investors the upside potential of stocks, as they can be converted into a predetermined number of shares, and they allow issuing firms to pay lower interest rates compared to traditional bonds because of the added value of the conversion option.

Quiz 16: Option Contracts

The conversion price parity for a convertible bond is defined as

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

In convertible bonds, the value of the common stock price upon immediate conversion is the

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

All of the following are normal characteristics of a convertible bond, EXCEPT

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strap using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

All of the following are normal characteristics of a convertible bond, EXCEPT

The conversion premium for a convertible bond is calculated as

The minimum price of a convertible bond is

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

The payment of any compensation for loss is contingent on the actual occurrence of a credit-related event under a

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

An advantage of convertible bonds is