Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1) A convertible bond is a. like a straight bond plus a warrant, but the warrant in the convertible bond cannot be sold separately b.

1)

A convertible bond is

a.

like a straight bond plus a warrant, but the warrant in the convertible bond cannot be sold separately

b.

like stock plus a put option on the stock

c.

like stock plus a call option on a straight bond

d.

like a straight bond plus a call option on the stock

e.

A and B

f.

A and C

g.

A and D

h.

B and C

i.

B and D

j.

C and D

k.

all but A

l.

all but B

m.

all but C

n.

all but D

o.

all are true

p.

none are true

2)

Hedging

a.

is like having insurance

b.

reduces return

c.

reduces risk

d.

is a trade-off between risk and return

e.

A and B

f.

A and C

g.

A and D

h.

B and C

i.

B and D

j.

C and D

k.

all but A

l.

all but B

m.

all but C

n.

all but D

o.

all are true

p.

none are true

3)

Viewing things in terms of options

a.

stock can be viewed in terms of a put option on the firm's assets

b.

stock can be viewed in terms of a call option on the firm's assets

c.

insurance can be viewed in terms of a put option on the insured asset

d.

insurance can be viewed in terms of a call option on the insured asset

e.

A and B

f.

A and C

g.

A and D

h.

B and C

i.

B and D

j.

C and D

k.

all but A

l.

all but B

m.

all but C

n.

all but D

o.

all are true

p.

none are true

4)

You ask a staff person to get you some financial information. The staffer returns with the following information: a stock is selling for $28.07, a call option expiring in 8 months with a strike price of $30 is selling for $2.60, and a put option expiring in 9 months with a strike price of $30 is selling for $2.01.

a.

surely the stock price is wrong

b.

surely the call value is wrong

c.

surely the put value is wrong

d.

surely the strike price is wrong

e.

A and B

f.

A and C

g.

A and D

h.

B and C

i.

B and D

j.

C and D

k.

all but A

l.

all but B

m.

all but C

n.

all but D

o.

all are true

p.

none are true

5

A bond can be redeemed by its owner for its face value after either 5 or 10 years. So at the end of 5 years, the bondholder must make a one-time choice to either redeem the bond then or let it continue for 5 more years. This complex financial security can be described as

a.

10-year straight bond plus a 5-year call option on it

b.

a 10-year straight bond plus a 5-year put option on it

c.

a 5-year straight bond plus a 5-year call option on another 5-year straight bond

d.

a 5-year straight bond plus a 5-year put option on another 5-year straight bond

e.

A and B

f.

A and C

g.

A and D

h.

B and C

i.

B and D

j.

C and D

k.

all but A

l.

all but B

m.

all but C

n.

all but D

o.

all are true

p.

none are true

6

Suppose you own a convertible bond that has a 6.1% coupon (paid semi-annually), $1,000 par value, matures in 11 years, and is currently selling for $1,783.54 in the bond market. The bond can be converted into 38 shares of the firm's common stock, and the common stock is currently selling for $45.72 per share.

What is this bond's yield to maturity?

a.

-0.7285%

b.

-0.5129%

c.

-0.3643%

d.

-0.2547%

e.

0.0000%

f.

0.2547%

g.

0.3643%

h.

0.5129%

i.

0.7285%

7

Suppose you own a convertible bond that has a 6.1% coupon (paid semi-annually), $1,000 par value, matures in 11 years, and is currently selling for $1,783.54 in the bond market. The bond can be converted into 38 shares of the firm's common stock, and the common stock is currently selling for $45.72 per share.

Should you convert the bond into shares of stock? Hint: Think carefully (in terms of the "big picture") before answering.

You're answer should either start with "Yes, because" or "No, because."

8

A stock currently sells for $67.38. A call option expiring in 8 months with a strike price of $70 sells for $4.63. A put option with the same strike price and maturity sells for $5.93. What APY (effective annual) riskless rate of return is implied by these stock and option prices?

a.

1.8857%

b.

1.9220%

c.

2.3529%

d.

2.4851%

e.

2.6913%

f.

2.8159%

g.

2.8967%

h.

2.9736%

i.

3.0279%

j.

3.1474%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Business Mathematics

Authors: Charles MillerStanley SalzmanStanley SalzmanGary Clendenen

11th Edition

0321500121, 9780321500120

More Books

Students also viewed these Finance questions

Question

8. What values do you want others to associate you with?

Answered: 1 week ago