5 ___ is the amount by which the call price exceeds the ___ of a callable bond. Call premium; face value Call premium; conversion ratio Conversion premium, current stock price Conversion premium, face value QUESTION 6 ___ is the rate by which the conversion price of a callable bond exceeds the ___ . Call premium; face value Conversion price; current stock price Call premium; conversion ratio Conversion premium, current stock price QUESTION 7 A _____ gives the holder the right, but not the obligation, to buy shares of common stock directly from the issuing company at a pre-specified exercise price for a defined period of time. Put option Warrant Convertible preferred stock Callable bond QUESTION 12 A PUT option in which the stock price is $60 and the exercise price is $65 is said to be ___ with an intrinsic value of ___ In the money; $5 At the money; $0 In the money; $0 Out of the money; $5 None of the above QUESTION 14 For this and the next 2 questions: An option on a stock has the following data: S = $60.36; E = $60; r = 1.75%; T = 18 days; std dev = 0.674 (i.e. 67.4%); market price of the call = $3.50. Using the Black-Scholes model, N(d1) = 0.548 and N(d2) = 0.4884. What is the intrinsic value of the CALL option? $0.36 $3.50 $3.14 QUESTION 15 What is the time value of the call option? $3.50 $3.14 None of the above QUESTION 17 You have a LONG STOCK position with an initial price of $160 per share. Afraid that prices may go down, you execute a PROTECTIVE PUT at E = 165; p = 7.5. What is your profit if, at expiration, stock price is $185? Loss of $7.5 per share Gain of $17 per share Gain of $17.5 per share None of the above QUESTION 18 You have a LONG STOCK position with an initial price of $160 per share. Afraid that prices may go down, you execute a COVERED CALL hedge at E = 165; c = 8. What is your profit if, at expiration, stock price is $185? Gain of zero Loss of $13 per share Gain of $10.25 Gain of $13 per share None of the above QUESTION 19 Suppose the exchange rate on the 180-day forward contract on the Swiss franc is $0.80 per Swiss franc. You live in the U.S. but are considering the purchase of a shipment of Swiss watches costing 10 million Swiss francs. The merchant in Zurich has promised you that the cost of the shipment will not change over the next 180 days. But you worry that the dollar will weaken further against the Swiss franc, making the dollar-cost of the shipment more expensive than at present. To hedge this foreign exchange risk, you buy the 180-day forward contract on Swiss francs at the quoted rate. Without a forward contract, what is the dollar-cost of the shipment if the spot exchange rate at the time of purchase is $0.75? $7,000,000 $7,500,000 $13,333,333 None of the above QUESTION 20 REPEAT: Suppose the exchange rate on the 180-day forward contract on the Swiss franc is $0.80 per Swiss franc. You live in the U.S. but are considering the purchase of a shipment of Swiss watches costing 10 million Swiss francs. The merchant in Zurich has promised you that the cost of the shipment will not change over the next 180 days. But you worry that the dollar will weaken further against the Swiss franc, making the dollar-cost of the shipment more expensive than at present. To hedge this foreign exchange risk, you buy the 180-day forward contract on Swiss francs at the quoted rate. With a forward contract, calculate the total cost in USD. $7,000,000 $8,000,000 $13,333,333 None of the above QUESTION 21 Your current inventory of crude oil is worth $12 million. You wish to hedge its downside risk. Using a nave hedge, how many futures contracts should be sold if f = 15.55 and S = 15? Note that the size of one contract is 1,000 barrels. About 772 About 12 About 15,550 None of the above QUESTION 22 Suppose you buy an asset for $70 and sell a futures contract for $72. How much is your profit if, prior to maturity, you sell the asset for $75 and the futures price is $78? -$1 $1 -$6 None of the above QUESTION 26 Which of the following may be considered a perverse incentive for a firm? A firm issues a convertible bond knowing that the bond would naturally have a comparatively low interest rate since bondholders can convert it to the firm's common stock if the firm does well. A firm borrows heavily and invests the amount in a high-risk project, which it knows to have a high likelihood of failure None of the above QUESTION 27 Which of the following are true? [I] The exercise of a call does not change the number of shares outstanding; the exercise of a warrant may result in an increase in the number of shares outstanding [II] Warrants typically have a shorter maturity that options [III] Call options can only be sold by the issuing firm; warrants can be traded by individual investors [IV] Warrants are issued by firms; options are created by financial exchanges I, II, III I, IV II, III, IV III, IV QUESTION 28 A callable bond can be called at 15% above par. The coupon rate on the bond is 8% and the bond has 10 years to maturity. Suppose the bond pays coupons SEMI-ANNUALLY. Calculate the yield-to-call if the bond has 4 years to the nearest call date and is currently selling for $1,050. 9.627% 9.6% 6.539 None of the above