Question 1

Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 15-year, semiannual payment, 6% coupon bond is 105-21. If the bond has a $1,000 par value, what is the implied Treasury bond rate?

Accepted Answer

The bond's price is quoted as 105-21, which means 105 and 21/32 percent of the par value. This translates to a price of $1,052.625. The bond pays a 6% coupon, or $60 annually ($30 semiannually). The yield to maturity (YTM) can be calculated using the bond price, coupon payments, and time to maturity. The YTM that equates the present value of the bond's cash flows to its price is approximately 5.44%.

Question 2

A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25. Meyers' current stock price is $48. What is the option premium?

Accepted Answer

The option premium is equal to the market price of the option, which is given as $8.25. The current stock price of Meyers Inc. is $48. Therefore, the option is in-the-money because the strike price is lower than the stock price. The intrinsic value of the option is $48 - $45 = $3. The remaining $8.25 - $3 = $5.25 is the time value of the option. Hence, the option premium is $8.25.

Question 3

Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

Accepted Answer

The answer of Which of the following events is likely...

Question 4

Lissa Co.'s stock price is currently $30.25. A 6-month call option on Lissa's stock has a strike price of $25 and has an expected volatility of 40% (i.e., expected standard deviation = 40%). The risk-free rate is 6%. According to the Black-Scholes option pricing model, what is the value of the option?

Accepted Answer

The answer of Lissa Co.'s stock price is currently $30.25....

Question 5

A 6-month put option on Makler Corp.'s stock has a strike price of $45 and sells in the market for $8.90. Makler's current stock price is $41. What is the exercise value of the option?

Accepted Answer

The answer of A 6-month put option on Makler Corp.'s...

Question 6

Which of the following statements regarding factors that affect call option prices is CORRECT?

Accepted Answer

The price of a call option increases as the risk-free rate increases because the present value of the exercise price decreases, making the option more attractive.

Question 7

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25. Romer's current stock price is $48. What is the exercise value of the option?

Accepted Answer

The answer of A 6-month call option on Romer Technologies'...

Question 8

A 6-month put option on Smith Corp.'s stock has a strike price of $45 and sells in the market for $8.90. Smith's current stock price is $41. What is the option premium?

Accepted Answer

The answer of A 6-month put option on Smith Corp.'s...

Quiz 18: Derivatives and Risk Management