Question :
79. A homeowner can refinance the mortgage loan the house at : 1284473
79. A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down. The right to refinance at a lower rate is a(n):
A. put option.
B. call option.
C. option to expand.
D. none of these.
80. The major difference between options on real assets and options on financial assets is that options on:
A. financial assets are costly.
B. financial assets have a higher probability of positive payoff.
C. real assets are implicit, rather than explicit.
D. real assets are not influenced by price volatility.
81. The option to abandon a project investing in real assets can be considered to have a strike price equal to the:
A. historical cost of the asset.
B. market value of the asset at abandonment.
C. forgone revenues anticipated from the project.
D. forgone interest on the bonds used to finance the real assets.
82. Firms spend an increasing amount of time evaluating real options, which are:
A. options on real assets such as an option to abandon.
B. call and put options traded on organized exchanges.
C. call options such as warrants and convertible bonds.
D. put options such as held by shareholders of a firm with financial leverage.
83. Adding warrants as a “sweetener” to bonds will:
A. reduce the value of the bond.
B. increase the coupon rate of the bond.
C. increase the value of the bond.
D. make the bond riskier.
84. If you feel strongly that a stock price will move, but are unsure of the direction, you could buy the stock and:
A. buy both a put and a call.
B. sell both a put and a call.
C. buy a put and sell a call.
D. buy two puts.
85. The payoffs from holding a call option can be replicated by:
A. borrowing money to buy a put option.
B. borrowing money to invest in the stock.
C. simultaneously selling a call and buying a put.
D. simultaneously buying a share and buying a put.
86. Investors who hold warrants essentially have a:
A. put option on the firm’s bonds.
B. put option on the firm’s equity.
C. call option on the firm’s bonds.
D. call option on the firm’s equity.
87. The conversion ratio for a convertible bond equals the:
A. ratio of bond value to stock price at conversion.
B. number of bonds necessary to convert into one share of stock.
C. number of shares of stock that can be exchanged for one bond.
D. floor value beneath which the bond price cannot fall.
88. The value of a callable bond equals the value of a straight bond:
A. plus the value of the bondholder’s call option.
B. minus the value of the bondholder’s call option.
C. plus the value of the issuer’s call option.
D. minus the value of the issuer’s call option.
89. Which of the following statements is correct?
A. A convertible bond will be priced less than a similar callable bond.
B. A convertible bond will be priced more than a similar callable bond.
C. Similar callable and convertible bonds will have the same price.
D. Warrants are always priced more than convertible bonds.
90. Which of the following statements is correct for an investor who has purchased “portfolio insurance” by owning the stock and buying a put option on the stock?
A. The investor profits when the stock price declines.
B. Maximum profitability occurs when stock price equals strike price.
C. Value per share can decline no further than the strike price less the value of the option premium.
D. The option will certainly be exercised.
91. Corporations that attach warrants to their bonds are hoping to:
A. sell equity without paying flotation costs.
B. convert the bonds into stock at a later date.
C. reduce the cost of debt by increasing bond prices.
D. increase the price of their shares.
92. If a convertible bond can be thought of as a straight bond with a call option, then the call is owned by the _____, and the strike price is the _____.
A. debt issuer; stock price
B. debt issuer; straight bond value
C. bond investor; stock price
D. bond investor; straight bond value
93. Why should a convertible bond always be valued at more than its bond value or its conversion value up until maturity?
A. The bond holder is receiving higher interest rates.
B. The conversion value does not have an upper bound.
C. The conversion ratio may be decreased.
D. The bond does not have to be given up to exercise the option.
94. Which of the following is correct concerning callable bonds?
A. There is an upper bound on the bond’s price.
B. Their prices are higher than for straight bonds.
C. Their attraction to the issuer increases as interest rates increase.
D. The bond investor owns the call option.
