Chapter 23 Test bank – Static Key
1.
The seller of a put option is betting that the market value of the stock will decrease.
2.
The VIX is an estimate of expected future market volatility.
3.
A call option is worthless if the underlying stock is worthless.
4.
The lower limit on a call option’s value is equal to the greater of zero or the exercise price minus the stock price.
5.
A strategy of buying the stock and selling the put is called a protective put.
6.
The value of a call option increases as the exercise price decreases.
7.
The Financial Accounting Standards Board (FASB) requires that companies recognize the fact that employee stock options
are valuable and therefore are an expense just like salaries and wages.
8.
The Financial Accounting Standards Board (FASB) stipulates that companies must use an option valuation model to estimate
9.
The value of both call and put options increases as the variability of the stock price decreases.
10.
Callable bonds allow the investor to redeem the bond at face value or let the bond remain outstanding until maturity.
11.
Warrants do not expire.
12.
Convertible bonds give the investor the option to acquire the firm’s stock in exchange for the value of the underlying bond.
13.
Callable bonds give the call option to the issuing firm and hence reduce the value of the bond.
14.
The longer the time until expiration of a call option, the lower the value of the option.
15.
Only at the expiration date can an investor expect to find the value of call options above their lower bound.
16.
Stock price volatility is beneficial to option holders.
17.
Unlike call options, the option to abandon a real asset can never be more valuable as time to expiration increases.
18.
A callable bond gives the issuer a potentially valuable option in the case of changing interest rates.
19.
At expiration a call option will have no value if the stock price is less than exercise price.
20.
At expiration a put option will have no value if the stock price is less than the exercise price.
21.
A protective put is a way to eliminate the downside risk of holding stock.
22.
The value of a call option increases as the exercise price increases.
23.
When the stock price is very high compared with the exercise price, the value of the call option approximates the difference
between the stock price and the present value of the exercise price.
24.
Warrants are long-term call options on a company’s stock issued by an organized stock exchange.
25.
A warrant is a long-term call option that is always “in the money” at the time of issuance.
26.
A callable bond will have a lower value than a straight bond with the same coupon rate and maturity.
27.
The floor of a convertible bond is the value of the underlying bond.
28.
The value of a convertible bond is always less than the value of a straight bond with similar coupon and maturity.
29.
The writer of a call option hopes that the stock price will:
30.
Adding warrants as a “sweetener” to bonds will:
31.
If you own a call and a put on a stock with the same exercise price and exercise date, your payoffs:
32.
Which one of the following is true for the owner of a call option?
33.
An increase in which one of the following will reduce the value of a call option?
34.
What is the difference between an American call option and a European call option?
35.
What is the option buyer’s total profit or loss per share if a call option is purchased for $5, has a $50 exercise price, and the
stock is valued at $53 at expiration?
36.
The maximum possible payoff to the owner of a put options is:
37.
Which one of the following option traders receives the price of the option?
38.
Which one of the following is true for an investor who purchased a share of stock for $45 and purchased a put option on the
stock with an exercise price of $45?
39.
An investor purchased a share of stock for $42 and at the same time paid $2 to purchase a put option on the stock with an
exercise price of $40. What is her profit if the stock is worth $30 at expiration?
40.
Which combination of positions will protect the owner from downside risk?
41.
If you feel strongly that a stock price will move a lot, but are unsure of the direction, you could:
42.
A stock is currently selling for $70 per share. What is the lower limit on the value of a call option with an exercise of $90?
43.
Why does the value of a call option increase as the interest rate increases?
44.
Which of the following statements is true of the holder of a call option?
45.
How much must the stock be worth at expiration in order for the buyer of a call option to break even if the exercise price is
$50 and the cost of the call was $4?
46.
What is the most an investor can lose if sells a call on the firm’s stock with an exercise price of $100?
47.
Which one of the following call options would command the higher price, other things equal? (All months are within the
same calendar year.)
48.
Put-call parity states that:
49.
Executive stock options are issued with the hope that the recipients will:
50.
The major difference between options on real assets and options on financial assets is that options on:
51.
The option to abandon a project investing in real assets can be considered to have an exercise price equal to the:
52.
Investors who hold warrants essentially have a:
53.
The conversion ratio for a convertible bond equals the:
54.
If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm’s stock is selling for $36
per share, then:
55.
If a $1,000 convertible bond has a conversion ratio of 50 and the firm‘s equity is currently selling for $22 per share, then the:
56.
Which one of the following conditions will typically be present when a firm calls a bond prior to maturity?
57.
The value of a callable bond equals the value of a straight bond: