QUESTION 8

What are the following call options' intrinsic values and time premiums if the price of the underlying stock is $55? (Remember to study the Call Option and intrinsic value first in Chapter 17 in the OCR)

Option strike price Price of the call

Call at

$50 $7.00

Call at $55 3.00

Call at $60 0.50

		a. None of the following (b to c) are true
		b. The intrinsic values are all 0
		c. The intrinsic value is $5.00
		The intrinsic value is $2.00

QUESTION 9

Corporation HBM has a convertible bond with the following terms:

coupon 5%

principal $1,000

maturity 10 years

conversion price $50 (20 shares)

call price $1,000 + one year's interest

The bond's credit rating is BBB, and comparable BBB rated bonds yield 9 percent. The firm's stock is selling for $45 and pays a dividend of $1.50 a share. The convertible bond is selling for $1,000. What is the premium paid over the bond's value as stock?

(Study chapter 16 in the OCR and see class examples in assignments and discussions)

		a. A total premium of $50.00
		b. A parvalue of $910.00
		c. A discount of $100.00
		d. A premium of $100.00

QUESTION 10

Convertible preferred stock

1. pays a fixed dividend

2. pays a variable dividend

3. may be converted into the firm's bonds

4. may be converted into the firm's stock

		a. 1 and 3
		b. 1 and 4
		c. 2 and 3
		d. 2 and 4