Question 1

Which one of the following terms applies to the value of an option on its expiration date?

Accepted Answer

The intrinsic value of an option is the difference between the strike price and the market price of the underlying asset on the expiration date. This applies only on the expiration date, and not throughout the life of the option. Therefore, E is the correct answer.

Question 2

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?

Accepted Answer

Jeff owns a convertible bond because he has the option to exchange it for shares of stock.

Question 3

Marti owns an option that allows him to purchase ABC stock at $50 a share.The $50 price is referred to as the:

Accepted Answer

The $50 price is referred to as the strike price on Marti's option. The strike price is the price at which the holder of an option has the right to buy or sell the underlying asset.

Question 4

What is the final day on which an option can be exercised called?

Accepted Answer

The final day on which an option can be exercised is called the expiration date. It is the last day on which the option holder can decide to exercise their right to buy or sell the underlying asset at the specified strike price. After the expiration date, the option becomes worthless.

Question 5

The difference between the conversion price and the current stock price,divided by the current stock price,is called the:

Accepted Answer

The difference between the conversion price and the current stock price, divided by the current stock price is the conversion premium. This measures the extra amount an investor has to pay for the privilege of converting a convertible security into common stock at a certain price.

Question 6

Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB Limited stock.Which one of the following terms refers to these 20 shares?

Accepted Answer

The conversion ratio refers to the number of shares that a bondholder can receive upon converting a convertible bond into stock, which in this case is 20 shares.

Question 7

Brad purchased an option that he can only exercise on the final day of the option period.Which type of option did he purchase?

Accepted Answer

European options can only be exercised on the expiration date, while American options can be exercised at any time during the option period.

Question 8

Which one of the following considers all of the options implicit in a project?

Accepted Answer

Contingency planning considers all of the options implicit in a project and includes planning for unexpected events or outcomes, and developing strategies to mitigate risks and ensure project success. Expansion planning, asset management review, prospective evaluation, and strategic evaluation may consider some of the options implicit in a project but do not necessarily include planning for unforeseen circumstances.

Question 9

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?

Accepted Answer

Suzie has been granted an employee stock option, which is the right to purchase shares of her employer's stock at a specific price within a certain timeframe.

Question 10

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

Accepted Answer

Real option refers to an option that has an underlying asset that is a physical asset, such as real estate, oil, or commodities. An office building is an example of a physical asset, making D the correct choice. Financial option (A) refers to options with underlying financial assets, such as stocks or bonds. Liquid option (B) and fixed option (C) are not commonly used terms in finance. Concrete option (E) is not a commonly used term in the context of options.

Question 11

The investment timing decision is the:

Accepted Answer

The investment timing decision involves evaluating the optimal time to begin a project to maximize its value or returns.

Question 12

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?

Accepted Answer

An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price, called the strike price, at any time during the life of the contract. This grants the owner the right to buy or sell the asset, but they are not obligated to do so. A forward contract, futures contract, and swap are all agreements between parties to buy or sell an asset in the future, but they differ in terms of the specifics of the agreement and the obligations of each party. An intrinsic contract is not a financial term.

Question 13

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Accepted Answer

The owner of a put option has the right to sell an underlying asset at a fixed price during a specified period of time. It gives the owner the option to sell the asset if the price decreases below the strike price, allowing them to protect themselves from potential losses.

Question 14

Which of the following grants its owner the right to purchase an asset at a stated price?
I.American call
II.European call
III.American put
IV.European put

Accepted Answer

Both American call and European call options grant their owners the right to purchase an asset at a stated price, while American put and European put options grant the right to sell an asset at a stated price. Therefore, options I and II are correct, while options III and IV are incorrect.

Question 15

Amy is a current shareholder of DJ Industries.She has been given the right to purchase an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right within the next 12 months.What is this security called that Amy has been given?

Accepted Answer

Amy has been given a warrant, which is a type of security that gives the holder the right to buy a certain number of shares of stock at a set price within a specified time period.

Question 16

Felicia purchased an option which she can exercise anytime within the next six months.Which type of option did she purchase?

Accepted Answer

Felicia purchased an option that she can exercise anytime within the next six months, which means she has an American option. European options, on the other hand, can only be exercised on the expiration date.

Question 17

Elizabeth owns a call option on 100 shares of Microsoft stock.She has decided to buy those shares.This purchase is commonly referred to as:

Accepted Answer

Exercising the option means that Elizabeth is using her right to buy the 100 shares of Microsoft stock at the strike price determined in her call option contract. This is different from the option expiring, which means that she chooses not to exercise her right and the option contract becomes worthless. The other options mentioned, such as putting the collar or the collar option, are not relevant to this scenario as they refer to a different type of options strategy.

Question 18

KT Enterprises has expanded its operations into a new field,which is the production of everyday dinnerware.If this project goes well,the firm has the option to expand its production into fine china.What type of option is this?

Accepted Answer

The option to expand production into fine china is a strategic option, as it involves making long-term decisions about the direction of the company's growth and the allocation of resources. A financial option would involve making decisions about investments or financing, while put options and call options are typically used in investment or trading contexts. Intangible options refer to options that are not physical or financial in nature, such as options related to intellectual property or brand recognition.

Question 19

The dollar amount of a bond's par value that is exchangeable for one share of stock is called the:

Accepted Answer

The conversion price is the dollar amount of a bond's par value that can be converted into one share of stock. It is a key term in convertible bonds, determining how many shares a bondholder gets upon conversion.

Question 20

Lucas Enterprises recently opted to open a new retail outlet.If the outlet outperforms the expectations,the manager can opt to increase the store's size.If it underperforms,the manager can opt to close the store.These choices that the manager has been given are called:

Accepted Answer

These choices are referred to as "managerial options" because they provide the management with the flexibility to adapt their strategies based on the performance of the retail outlet, similar to how financial options provide flexibility to investors.

Quiz 24: Options and Corporate Finance