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The market price of Southern Press stock has been relatively volatile and you think this volatility will continue for a couple more months. Thus, you decide to purchase a two-month European call option on this stock with a strike price of $45 and an option price of $2.20. You also purchase a two-month European put option on the stock with a strike price of $45 and an option price of $0.30. What will be your net profit or loss on these option positions if the stock price is $48 on the day the options expire? Ignore trading costs and taxes.


A) -$30
B) $50
C) $80
D) $270
E) $330

F) A) and B)
G) All of the above

Correct Answer

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B

Which one of the following statements regarding employee stock options (ESOs) is correct?


A) ESOs grant an employee the right to buy a fixed number of shares of company stock at the market price.
B) Employees must exercise their ESOs prior to those ESOs becoming vested.
C) Employees may forfeit their ESOs if they terminate their employment with the issuing firm.
D) If a firm issue ESOs it must make them available to all employees.
E) Employees can sell their ESOs if they do not want to personally exercise them.

F) B) and E)
G) All of the above

Correct Answer

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C

Employee stock options are primarily designed to do which one of the following?


A) provide employees with put options on their shares of company stock
B) provide an immediately vested benefit to key employees
C) influence the actions and priorities of employees
D) distribute excess cash to key employees to avoid corporate taxation
E) provide an immediate capital gain to certain employees

F) All of the above
G) A) and E)

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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

F) A) and B)
G) A) and C)

Correct Answer

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You sold one call option contract with a strike price of $55 when the option was quoted at $0.80. The option expires today when the value of the underlying stock is $53.70. Ignoring trading costs and taxes, what is the net profit or loss on this investment?


A) -$250
B) -$80
C) $0
D) $50
E) $80

F) B) and C)
G) A) and E)

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Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy those shares. This purchase is commonly referred to as:


A) striking the asset.
B) expiring the option.
C) exercising the option.
D) putting the collar.
E) the collar option.

F) A) and D)
G) A) and B)

Correct Answer

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Three months ago, Central Supply stock was selling for $51.40 a share. At that time, you purchased five put options on the stock with a strike price of $50 per share and an option price of $0.60 per share. The option expires today when the value of the stock is $42.70 per share. What is your net profit or loss on this investment? Ignore trading costs and taxes.


A) -$1,300
B) -$1,000
C) -$300
D) $3,350
E) $3,650

F) A) and B)
G) A) and C)

Correct Answer

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A convertible bond has a face value of $5,000 and a conversion price of $80. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 7.5 percent. The current price of the stock is $41.20 per share. What is the conversion value of this bond?


A) $1,680
B) $2,415
C) $2,575
D) $4,651
E) $5,000

F) B) and E)
G) C) and D)

Correct Answer

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What is the cost of two November $25 put option contracts on Dove stock given the following price quotes? What is the cost of two November $25 put option contracts on Dove stock given the following price quotes? A) $0.15 B) $0.30 C) $1.50 D) $15.00 E) $30.00


A) $0.15
B) $0.30
C) $1.50
D) $15.00
E) $30.00

F) A) and B)
G) A) and C)

Correct Answer

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Last month, Hill Side Markets introduced a new board game. Consumer demand has been overwhelming and appears that strong demand will exist over the long-term as young children absolutely love the game. Given this, which one of the following options should Hill Side Markets consider in respect to this game?


A) suspension
B) expansion
C) abandonment
D) contraction
E) withdrawal

F) A) and C)
G) A) and B)

Correct Answer

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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 2 years. What type of bond does Jeff own?


A) secured
B) warranted
C) convertible
D) junk
E) callable

F) D) and E)
G) A) and C)

Correct Answer

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A $1,000 convertible debenture has a conversion price for common stock of $85 per share. The common stock is selling at $92 a share. What is the conversion value of this bond?


A) $920.00
B) $923.91
C) $1,000.00
D) $1,082.35
E) $1,092.00

F) A) and C)
G) B) and C)

Correct Answer

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Employee stock options:


A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.

F) A) and B)
G) C) and D)

Correct Answer

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Three weeks ago, you purchased a June $30 put option on Leeper Metals stock at an option price of $1.80. The market price of the stock three weeks ago was $30.60. Today, the stock is selling at $29.80 a share. What is the intrinsic value of your put contract?


A) -$100
B) -$20
C) $0
D) $20
E) $60

F) All of the above
G) B) and D)

Correct Answer

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You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share. Today, the contracts expire and the stock is selling for $31.15 a share. What is your net profit or loss on this investment? Ignore trading costs and taxes.


A) -$115
B) -$105
C) $20
D) $105
E) $210

F) A) and D)
G) B) and D)

Correct Answer

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Kurt owns a convertible bond that matures in three years. The bond has a 7.5 percent coupon and pays interest semi-annually. The face value of the bond is $1,000 and the conversion price is $25. Similar bonds have a market return of 9.25 percent. The current price of the stock is $26.50 per share. What is the straight bond value?


A) $948.20
B) $955.05
C) $972.80
D) $987.78
E) $991.15

F) A) and D)
G) C) and D)

Correct Answer

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Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye's assets is currently $1,200. Jim Tressell, the CEO, believes that the assets in the firm will be worth either $600 or $1,700 in a year. The going rate on one-year T-bills is 6 percent. What is the current value of the firm's debt?


A) $601.18
B) $796.57
C) $844.24
D) $878.78
E) $911.03

F) B) and E)
G) All of the above

Correct Answer

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Which one of the following describes the intrinsic value of a call option?


A) the call's upper bound value
B) the call's lower bound value
C) market price of the underlying security
D) zero, if the call is in-the-money
E) negative amount, if the call is out-of-the-money.

F) C) and D)
G) B) and C)

Correct Answer

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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.

F) A) and B)
G) All of the above

Correct Answer

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The price of Dimension, Inc. stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. Suppose the current price of Dimension stock is $70. What is the value of the call option if the exercise price is $70 per share?


A) $6.07
B) $8.48
C) $11.58
D) $15.39
E) $17.62

F) A) and C)
G) B) and D)

Correct Answer

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A

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