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You own a July $15 call on ABC stock.Assume today is April 20 and the call has zero intrinsic value.Which one of the following best describes this option?


A) worthless
B) unfunded
C) expired
D) in-the-money
E) out-of-the-money

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

Correct Answer

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Suzie is the controller of The Price Rite Company.She has been granted the right to buy 1,000 shares of her employer's stock at $25 a share anytime within the next three years.Which one of the following has Suzie been granted?


A) employee stock option
B) company bonus option
C) employee grant
D) employee exercise option
E) company benefits option

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

Correct Answer

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Which one of the following terms applies to an option that has an office building as its underlying asset?


A) financial option
B) liquid option
C) fixed option
D) real option
E) concrete option

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

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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

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

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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 E)
G) A) and B)

Correct Answer

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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 B)

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Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?


A) option
B) forward contract
C) futures contract
D) swap
E) intrinsic contract

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

Correct Answer

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What is the primary difference between an American call option and a European call option?


A) The American call has a fixed strike price while the European strike price varies over time.
B) An American call is a right to buy while a European call is an obligation to buy.
C) An American call has an expiration date while the European call does not.
D) An American call is written on 100 shares of the underlying security while the European call covers 1,000 shares.
E) An American call can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.

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

Correct Answer

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-Lucinda owns a convertible bond that matures in six years.The bond has a 9 percent coupon and pays interest annually.The face value of the bond is $1,000 and the conversion price is $22.Similar bonds have a market return of 8.75 percent.The current price of the stock is $21.60 per share.What is the conversion value of this bond? A) $835.60 B) $848.40 C) $942.11 D) $981.82 E) $1,000.00 -Lucinda owns a convertible bond that matures in six years.The bond has a 9 percent coupon and pays interest annually.The face value of the bond is $1,000 and the conversion price is $22.Similar bonds have a market return of 8.75 percent.The current price of the stock is $21.60 per share.What is the conversion value of this bond?


A) $835.60
B) $848.40
C) $942.11
D) $981.82
E) $1,000.00

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

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

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-Patience is reviewing a project with projected sales of 4,200 units a year,a cash flow of $28 a unit,and a four-year project life.Assume all operating cash flows occur on the last day of each year.The initial cost of the project is $247,000.The relevant discount rate is 13 percent.Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $110,000.At what level of annual sales,starting in year 3,should she be willing to abandon this project? A) 2,119 units B) 2,355 units C) 2,367 units D) 2,516 units E) 2,667 units -Patience is reviewing a project with projected sales of 4,200 units a year,a cash flow of $28 a unit,and a four-year project life.Assume all operating cash flows occur on the last day of each year.The initial cost of the project is $247,000.The relevant discount rate is 13 percent.Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $110,000.At what level of annual sales,starting in year 3,should she be willing to abandon this project?


A) 2,119 units
B) 2,355 units
C) 2,367 units
D) 2,516 units
E) 2,667 units

F) None of the above
G) All of the above

Correct Answer

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Which one of the following describes the lower bound of a call's value?


A) strike price or zero,whichever is greater
B) stock price minus the exercise price or zero,whichever is greater
C) strike price or the stock price,whichever is lower
D) strike price or zero,whichever is lower
E) stock price minus the exercise price or zero,whichever is lower

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

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Which of the following will decrease the value of a call option? I.a decrease in the exercise price II.a decrease in the value of the underlying security III.an increase in the risk-free rate IV.an increase in the time to expiration


A) II only
B) I and II only
C) III and IV only
D) I,II,and IV only
E) I,II,and III only

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

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You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share.What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?


A) -$2,840
B) -$1,760
C) -$1,080
D) $1,080
E) $1,760

F) None of the above
G) C) and D)

Correct Answer

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You purchased six call option contracts on ABC stock with a strike price of $32.50 when the option was quoted at $1.65.The option expires today when the value of ABC stock is $34.60.Ignoring trading costs and taxes,what is the net profit or loss on this investment?


A) $0
B) $270
C) $310
D) $840
E) $1,260

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

Correct Answer

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Three months ago,Toy Town introduced a new toy for pre-school children.The store expected this toy to be an instant success and a fast moving item.To their surprise,children have zero interest in this toy so sales have been abysmal.Which one of the following options should Toy Town consider in respect to this toy?


A) suspension
B) expansion
C) abandonment
D) contraction
E) re-introduction

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

Correct Answer

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-You own a convertible bond with a face value of $1,000 and a market value of $1,034.The bond can be converted into 16 shares of stock.What is the conversion price? A) $62.50 B) $64.63 C) $71.43 D) $73.86 E) $74.33 -You own a convertible bond with a face value of $1,000 and a market value of $1,034.The bond can be converted into 16 shares of stock.What is the conversion price?


A) $62.50
B) $64.63
C) $71.43
D) $73.86
E) $74.33

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

Correct Answer

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-We are examining a new project.We expect to sell 9,500 units per year at $48 net cash flow apiece for the next 20 years.In other words,the annual operating cash flow is projected to be $45 × 9,000 = $405,000.The relevant discount rate is 14 percent,and the initial investment required is $1,730,000.After the first year,the project can be dismantled and sold for $1,350,000.If expected sales are revised based on the first year's performance,it would make sense to abandon the investment if the sales are less than which of the following number of units? A) 4,294 units B) 4,620 units C) 4,750 units D) 4,810 units E) 5,020 units -We are examining a new project.We expect to sell 9,500 units per year at $48 net cash flow apiece for the next 20 years.In other words,the annual operating cash flow is projected to be $45 × 9,000 = $405,000.The relevant discount rate is 14 percent,and the initial investment required is $1,730,000.After the first year,the project can be dismantled and sold for $1,350,000.If expected sales are revised based on the first year's performance,it would make sense to abandon the investment if the sales are less than which of the following number of units?


A) 4,294 units
B) 4,620 units
C) 4,750 units
D) 4,810 units
E) 5,020 units

F) None of the above
G) B) and D)

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) D) and E)
G) A) and E)

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) None of the above
G) D) and E)

Correct Answer

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