FINC 512 Quiz 12

Which of the following option strategies would most likely result in a profit if the Peace of an underlying security increases? a.) Buying a call option on the security b.) Writing a strangle on the security c.) Buying a convertible bond d.)Shorting the security

a.) Buying a call option on the security

Which of the following statements regarding long straddles is most accurate? a.) Total premiums paid is the maximum loss. b.) The gain potential is limited. c.) Volatility is not expected. d.)The investor is bearish

a.) Total premiums paid is the maximum loss.

An investor who purchases a call option written on a broad equity index of stocks that can only be exercised on the expiration date most likely benefits when the value of the index: a.) VRises on the last day of the contract b.) Rises anytime before the last day of the contract. c.) Falls on the last day of the contract. d.) Falls anytime before the last day of the contract.

a.) VRises on the last day of the contract. NOT: b.) Rises anytime before the last day of the contract.

An investor owns a 15-year convertible bond that carries a 6% coupon rate and a $1,000 face value. The bond is exchanged for 40 shares of stock that has a current market value of $24. Similar nonconvertible bonds have a yield to maturity of 6.5%. The minimum value of the bond is closest to: a.) $952.99 b.) $960.00 c.) $1,000.00 d.) $1,116.03

b.) $960.00

Which of the following statements regarding callable bonds is most accurate? a.) The embedded call option increases the price of the callable bond b.) The embedded call option increases in value as interest rates fall c.) The issuer of a callable bond is the writer of the option d.) The embedded call option cannot be called by the issuer until the option expires

b.) The embedded call option increases in value as interest rates fall

Which of the following relationships regarding an out-of-the-money put option is most accurate? a.) Intrinsic value is less than $0 b.) The underlying security price must be greater than the exercise price c.) Time value will be positive at expiration d.) The option premium will always exceed its exercise price

b.) The underlying security price must be greater than the exercise price

An investor purchases a call option on a fixed income security index for $30. Which of the following results is most likely to occur if the index at expiration is $700 given an exercise price of $600. a.) The option is allowed to expire b.) The option will be exercised and the payoff will be $30 c.) The option will be exercised and the payoff will be $70. d.) The option will be exercised and the payoff will be $100

c.) The option will be exercised and the payoff will be $70. The profit on call option will be calculated as follows = (Current market price-strike price-option premium) Profit =(700−600−30)=70 Profit on exercising of call option is 70 because premium has been paid to the extent of 30.

An investor owns a convertible bond that can be exchanged for 25 hares of stock. The face value of the bond is $1,000 and the current price of the stock is $50. The conversion value is closest to: a.) $0 b.) $250 c.) $1,000 d.) $1,250

d.) $1,250 25x$50= $1,250

A call option written on a share of stock has an exercise price of $60. The option premium is $7 while the stock currently trades for $70. The intrinsic value of the option is closest to: a.) $0 b.) $3 c.) $7 d.) $10

d.) $10

Which of the following transactions with ownership of the underlying security most likely creates a floor to protect investors from downside risk? a.) Buying a call option. b.) Going short in a straddle c.) Using a collar d.) Buying a put option

d.) Buying a put option