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41) Lucas Enterprises recently opened a new retail outlet. If the outlet outperforms the
expectations, the company can opt to increase the store's size. If it underperforms, the company
can close the store. These choices are called:
A) call options.
B) put options.
C) straddles.
D) managerial options.
E) executive options.
42) Which one of the following considers all of the options implicit in a project?
A) Expansion planning
B) Contingency planning
C) Asset management review
D) Prospective evaluation
E) Strategic evaluation
43) Strategic options are:
A) valued the same as financial call options.
B) difficult to value.
C) valued based on their first year's net income.
D) considered useless as they generally have negative NPVs.
E) increasingly easy to evaluate and value.
44) Amy is a current shareholder of DJ Industries. She has been given the right to purchase an
additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right
within the next 12 months. What is this security called that Amy has been given?
A) Convertible bond
B) Warrant
C) Straddle
D) Spread
E) Put
45) Jeff owns a $1,000 face value bond. He can exchange that bond for 25 shares of KNJ stock at
any time within the next two years. What type of bond does Jeff own?
A) Secured
B) Warranted
C) Convertible
D) Junk
E) Callable
46) The dollar amount of a bond's par value that is exchangeable for one share of stock is called
the:
A) conversion premium.
B) par value.
C) conversion value.
D) conversion price.
E) conversion ratio.
47) Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB Limited
stock. Which one of the following terms refers to these 20 shares?
A) Conversion premium
B) Straight bond value
C) Conversion value
D) Conversion price
E) Conversion ratio
48) The difference between the conversion price and the current stock price, divided by the
current stock price, is called the:
A) conversion premium.
B) straight bond value.
C) conversion value.
D) conversion price.
E) conversion ratio.
49) Latetia owns a convertible bond. Which one of the following terms would describe the value
of this bond if it were not convertible?
A) Conversion premium
B) Straight bond value
C) Conversion value
D) Inverted value
E) Market value
50) Brad owns a convertible bond. Which one of the following terms would apply to the value of
this bond if he were to convert it into shares of stock today?
A) Conversion premium
B) Straight bond value
C) Conversion value
D) Inverted value
E) Prescribed value
51) Warrants are:
A) generally issued as an attachment to publicly issued bonds.
B) excluded from trading on an organized exchange.
C) structured as long-term put options.
D) issued by individual investors.
E) often added as an incentive to a private debt issue.
52) Which one of the following statements concerning warrants is correct?
A) Warrants are similar to put options.
B) Warrants generally have very short maturity periods.
C) Owning a warrant is the same as selling a call option.
D) When a warrant is exercised, the number of outstanding shares increases.
E) Shares are transferred from one shareholder to another when a warrant is exercised.
53) When warrants are exercised, the:
A) earnings per share decrease.
B) earnings per share remain constant.
C) total equity in the firm remains constant.
D) total equity in a firm decreases.
E) number of bonds outstanding increases.
54) Which one of the following statements concerning convertible bonds is false?
A) A convertible bond is similar to a bond with a call option.
B) A convertible bond should always be worth less than a comparable straight bond.
C) New shares of stock are issued when a convertible bond is converted.
D) A convertible bond can be redeemed just like a straight bond at maturity.
E) A convertible bond can be described as having upside potential with downside protection.
55) The conversion value of a convertible bond is equal to which one of the following?
A) Conversion ratio(Stock price)
B) Conversion ratio(Conversion price)
C) Face value/Conversion premium
D) Face value(1 + Conversion premium)
E) Stock price(1 + Conversion ratio)
56) The maximum value of a convertible bond is theoretically:
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.
57) The value of a convertible bond issued by a firm whose stock price exceeds the bond's
conversion price will:
A) be equal to the conversion value minus the straight bond value.
B) be equal to the face value of the bond multiplied by (1 + Conversion ratio).
C) be limited to the maximum straight bond value.
D) be equal to the bond's floor value.
E) generally exceed both the bond's floor value and its conversion value.
58) When you purchase insurance you are in essence:
A) buying a put option.
B) selling a put option.
C) buying a warrant.
D) buying a call option.
E) selling a call option.
59) QLM stock is currently selling for $28.60 a share. The December 25 call is quoted at $1.15 a
share compared to $.05 a share for the December 25 put. What is the cost of two December $25
put option contracts on this stock?
A) $.20
B) $.10
C) $5.00
D) $15.00
E) $10.00
60) What is the value of five September $40 call contracts on PTL stock if the option premium
quote is $1.35 a share and the stock is selling for $41.30 a share?
A) $25.00
B) $650
C) $6.75
D) $1.35
E) $675
61) Rosa purchased three call option contracts on ABC stock with a strike price of $27.50 when
the option was quoted at $1.10 per share. The option expires today when the value of ABC stock
is $29.30. Ignoring trading costs and taxes, what is the net profit on this investment?
A) $0
B) $210
C) $330
D) $140
E) $70
62) Theresa sold ten call option contracts with a strike price of $25 when the option was quoted
at $.55 per share. The options expire today when the value of the underlying stock is $24.10.
Ignoring trading costs and taxes, what is the net profit on this investment?
A) −$35
B) −$350
C) $0
D) $55
E) $550
63) Vince sold two $45 call option contracts at a quoted price of $1.15 per share. What is the net
profit on this investment if the price of the underlying asset is $48.10 on the option expiration
date? Ignore trading costs and taxes.
A) −$390
B) −$195
C) $0
D) $115
E) $230
64) Su Lee wrote three call option contracts with a strike price of $22.50 and an option price of
$.55 per share. What is the net profit on this investment if the price of the underlying stock is
$22.95 per share on the option expiration date? Ignore trading costs and taxes.
A) $10
B) $.30
C) $.10
D) $30
E) $0
65) The market price of NM stock has been volatile recently. Since you think the volatility will
continue, you purchase a two-month European NM call option with a strike price of $30 and an
option price of $.60. You also purchase a two-month European NM put option with a strike price
of $30 and an option price of $1.20. What will be your net profit on these option positions if the
stock price is $28 on the day the options expire? Ignore trading costs and taxes.
A) −$60
B) $20
C) $0
D) −$20
E) $60
66) Les sold a one-month European $25 call and a one-month European $25 put on ABC stock.
The call price per share is $.70 and the put price per share is $1.80. What will be the net profit on
these option positions if the stock price is $23 on the day the options expire? Ignore trading costs
and taxes.
A) $110
B) −$50
C) −$110
D) $50
E) $20
67) Stu purchased six put options on XY stock with a strike price of $45 and an option price of
$2.60 per share. The option expires today when the value of the stock is $41.40 per share. What
is the net profit on this investment? Ignore trading costs and taxes.
A) −$260
B) −$100
C) $100
D) $600
E) $260
68) Cara wrote a put option contract on EZ stock with an exercise price of $40 per share and an
option price of $.65 per share. Today, the contracts expire and the stock is selling for $34.30 a
share. What is the net profit on this investment? Ignore trading costs and taxes.
A) −$635.00
B) $50.50
C) $635.00
D) $63.50
E) −$505.00
69) You sold two $42.50 put contracts on CTB stock at an option price per share of $1.90. The
options were exercised today when the market price was $38.60 a share. What is your net profit
on this investment? Ignore transaction costs and taxes.
A) −$510
B) −$400
C) $300
D) $850
E) $1,160
70) A November $40 call has a premium of $4.60 a share while the underlying stock is priced at
$44.15. What is the intrinsic value of this call?
A) $0
B) $1.45
C) $.45
D) $4.15
E) $4.60
71) You own five call option contracts on Swift Water Tours stock with a strike price of $25 per
share and an option premium of $.45 per share. What is the total intrinsic value of these options
today if the stock is currently selling for $25.20 a share?
A) $20
B) $45
C) $0
D) $450
E) $100
72) You recently purchased six put option contracts on a stock with an exercise price of $45 and
an option premium of $.65. What is the total intrinsic value of these contracts if the stock is
currently selling for $46.20 a share?
A) −$360
B) −$120
C) $0
D) $420
E) $750
73) Last week, you purchased a call option on a stock with a strike price of $35. The stock price
was $33.30 and the option price was $.35 at that time. What is the current intrinsic value per
share if the stock is now selling at $36.60 a share?
A) $1.25
B) $1.95
C) $1.60
D) −$3.30
E) $0
74) Three weeks ago, you purchased a June $47.50 put option on Hi-Tech Metals stock at an
option price of $.60 per share. The market price of the stock three weeks ago was $47.20. Today,
the stock is selling at $48.10 a share. What is the intrinsic value of your put contract?
A) −$240
B) $60
C) −$60
D) $0
E) $240
75) This morning, you purchased a call option on School house Supply Co. stock that expires in
one year. The exercise price is $37.50. The current price of the stock is $37.60 and the risk-free
rate of return is 3.1 percent. Assume the option will finish in the money. What is the current
value of the call option?
A) $0
B) $.95
C) $.10
D) $1.23
E) $1.09
76) You currently own a one-year call option on RCI stock. The current stock price is $51.20 and
the risk-free rate of return is 3.36 percent. Your option has a strike price of $50 and you assume
the option will finish in the money. What is the current value of your call option?
A) $1.16
B) $1.24
C) $2.83
D) $3.13
E) $2.28
