FIN 480 UPDATED EXAM ACTUAL QUESTIONS AND
ANSWERS SURE A+
✔✔You purchased eight TJH call option contracts with a strike price of $37.50 when the
option quote was $.55. The option expires today when the value of TJH stock is $37.10.
Ignoring trading costs and taxes, what is your total profit on your investment? - ✔✔- -
$440
- You will not exercise the call option because the strike price is greater than the stock
price. Why pay more than market price to purchase shares? Thus, your loss is equal to
the amount paid to purchase the option contracts:
- Total profit = 8 × 100 × (-$.55) = -$440
✔✔Three months ago, you purchased three put option contracts on WXX stock with a
strike price of $60 and an option price of $.60. The option expires today when the value
of WXX stock is $48.10. Ignoring trading costs and taxes, what is your total profit on
your investment? - ✔✔- $3,390
- Total profit = 3 ×100 × (-$.60 - 48.10 + 60)
- Total profit = $3,390
✔✔The market price of ABC stock has been very volatile and you think this volatility will
continue for several weeks. Thus, you decide to purchase one two-month call option
contract on ABC stock with a strike price of $25 and an option price of $1.30. You also
purchase one two-month put option on ABC stock with a strike price of $25 and an
option price of $.50. What will be your total profit on these positions if the stock price is
$25.60 on the day the options expire? - ✔✔- -120$
- Total profit = [1 × 100 × (-$1.30 - 25 + 25.60)] + [1 × 100 × (-$.50)]
- Total profit = -$120
✔✔If a call has a positive intrinsic value at expiration the call is said to be: - ✔✔In the
money
✔✔Concerning warrants and call options, which one of the following statements
generally is correct? - ✔✔Exercise of a call option does not affect share value, but
warrant exercise does.
✔✔Tru-U stock is selling for $41 a share. A 6-month call on Tru-U stock with a strike
price of $45 is priced at $1.60. Risk-free assets are currently returning .29 percent per
month. What is the price of a 6-month put on Tru-U stock with a strike price of $45? -
✔✔- $4.82
- Using put-call parity: S + P = C + PV(E) P = $1.60 + ($.00296) - $41 = $4.82
✔✔You wrote ten put option contracts on JIG stock with a strike price of $40 and an
option price of $.40. What is your total profit on this investment if the price of JIG is
$41.05 on the option expiration date? - ✔✔- $400
,- The buyer of the put contracts will not exercise them since the market price exceeds
the strike price. Why sell shares for less than the market value? Thus, your total profit
equals the option premium you received as the option writer.
- Total profit = 10 × 100 × $.40 = $400
✔✔Modern Windows issued warrants for one share per warrant with an exercise price
of $21. On May 1, the common stock is selling for $23 a share. The lower and upper
limits on the warrant value on this date are: - ✔✔- ANSD. $2 and $23.
- Lower limit = MAX[0,(Stock price - Exercise price)] = MAX[0,($23 -21)] Lower limit = $2
Upper limit = Stock price Upper limit = $23
✔✔A convertible bond matures in 15 years, pays annual coupons, and has a coupon
rate of 8 percent. The face value is $1,000 and the conversion ratio is 40. The stock
currently sells for $22.80 a share. Similar nonconvertible bonds are priced to yield 9
percent. The value of the convertible bond is at least: - ✔✔- $919.39.
- Straight bond value = Coupon payment × PVIFAr, t + Face value / (1 + r)t Straight
bond value = (.08 × $1,000) × ((1 / .09) - {1 / [.09(1 + .09)15]}) + $1,000 / (1 + .09)15
Straight bond value = $919.39 Conversion value = Conversion ratio × Price per share
Conversion value = 40 × $22.80 Conversion value = $912.00 Assuming there is no
option premium: Bond value = MAX[Straight bond value, Conversion value] Bond value
= MAX[$919.39, 912.00] Bond value = $919.39
✔✔Convertible bonds: A. are secured by shares of common stock. - ✔✔- ANSD. are
generally issued by firms that have lower bond ratings than the average firm. E. are
generally granted seniority over all other bonds.
✔✔Bright View Windows issued warrants with an exercise price of $17. Bright View's
common stock currently sells for $16 per share. The warrants are: - ✔✔Out of the
money
✔✔The gain from exercising a warrant is _____ the gain from exercising a comparable
call option. ANS$$ANSA. less than - ✔✔NO ANSWER
✔✔SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of
stock. Assume SBX declares a 3-for-1 stock split. What conversion price will be needed
following the stock split for the conversion value and the straight bond value to be equal
assuming the bond continually sells at par? - ✔✔- $16.67
- Conversion value = Straight bond value = Par value Conversion value = $1,000
Conversion price = Conversion value / Number of shares Conversion price = $1,000 /
[20 × ()] Conversion price = $16.67
✔✔Looper Industries has 400,000 shares of stock outstanding with a market price of
$32 a share. The firm also has 10,000 bonds outstanding with a face value of $1,000
and a conversion price of $40. The bonds mature tomorrow. You currently own 25,000
, shares of this stock and no bonds. What percent ownership in the firm should you
expect to have after tomorrow? A. 3.52% - ✔✔- ANSD. 6.25%
- The bonds will be submitted for redemption and not converted because the conversion
price exceeds the stock price. Percentage ownership = Number of shares owned / Total
shares Percentage ownership = 25,,000 Percentage ownership = .0625, or
6.25%
✔✔If the producer of a product has entered into a fixed price sale agreement for that
output, the producer faces: - ✔✔an uncertain profit if the input prices are volatile. This
risk can be reduced by a long hedge.
✔✔Suenette wants to own bonds but also wants their market values to remain as
steady as possible. Which type of bonds are best suited to her wishes? - ✔✔High
coupon, short term
✔✔Which one of these bonds has the lowest percentage price change for a stated shift
in interest rates? - ✔✔5-year high coupon
✔✔A miller who needs wheat to mill into flour most likely uses the futures market for
taking a: - ✔✔long hedge position to lock in production costs.
✔✔Futures market transactions are commonly used to reduce risk. The most risk
reduction can be obtained when the asset at risk and the futures contract: - ✔✔have
perfectly correlated price movements.
✔✔Prepackaged bankruptcies: - ✔✔area combination of a private workout and legal
bankruptcy.
✔✔Altman develop the Z-score model for publicly traded manufacturing firms. Using
financial statement data and multiple discriminant analysis, he found that: - ✔✔in actual
use, a Z-score of less than 1.81 would predict bankruptcy within one year.
✔✔Which one of these statements correctly identifies a condition which must be met for
creditors to force a firm into involuntary bankruptcy? - ✔✔If there are more than a dozen
creditors, then at least 3 with claims totaling $13,475 or more must participate in the
filing.
✔✔Section 363 as it relates to a bankruptcy filing - ✔✔works like an auction to speed
up the bankruptcy process.
✔✔Pat's Boats is being liquidated. The administrative costs of liquidation, taxes, and
wage payments are expected to be $450,000. Secured creditors have a mortgage lien
for $1.4 million on the real estate which was just liquidated and netted proceeds of $1.2
million. The other secured creditors have submitted claims totaling $274,000 and the
ANSWERS SURE A+
✔✔You purchased eight TJH call option contracts with a strike price of $37.50 when the
option quote was $.55. The option expires today when the value of TJH stock is $37.10.
Ignoring trading costs and taxes, what is your total profit on your investment? - ✔✔- -
$440
- You will not exercise the call option because the strike price is greater than the stock
price. Why pay more than market price to purchase shares? Thus, your loss is equal to
the amount paid to purchase the option contracts:
- Total profit = 8 × 100 × (-$.55) = -$440
✔✔Three months ago, you purchased three put option contracts on WXX stock with a
strike price of $60 and an option price of $.60. The option expires today when the value
of WXX stock is $48.10. Ignoring trading costs and taxes, what is your total profit on
your investment? - ✔✔- $3,390
- Total profit = 3 ×100 × (-$.60 - 48.10 + 60)
- Total profit = $3,390
✔✔The market price of ABC stock has been very volatile and you think this volatility will
continue for several weeks. Thus, you decide to purchase one two-month call option
contract on ABC stock with a strike price of $25 and an option price of $1.30. You also
purchase one two-month put option on ABC stock with a strike price of $25 and an
option price of $.50. What will be your total profit on these positions if the stock price is
$25.60 on the day the options expire? - ✔✔- -120$
- Total profit = [1 × 100 × (-$1.30 - 25 + 25.60)] + [1 × 100 × (-$.50)]
- Total profit = -$120
✔✔If a call has a positive intrinsic value at expiration the call is said to be: - ✔✔In the
money
✔✔Concerning warrants and call options, which one of the following statements
generally is correct? - ✔✔Exercise of a call option does not affect share value, but
warrant exercise does.
✔✔Tru-U stock is selling for $41 a share. A 6-month call on Tru-U stock with a strike
price of $45 is priced at $1.60. Risk-free assets are currently returning .29 percent per
month. What is the price of a 6-month put on Tru-U stock with a strike price of $45? -
✔✔- $4.82
- Using put-call parity: S + P = C + PV(E) P = $1.60 + ($.00296) - $41 = $4.82
✔✔You wrote ten put option contracts on JIG stock with a strike price of $40 and an
option price of $.40. What is your total profit on this investment if the price of JIG is
$41.05 on the option expiration date? - ✔✔- $400
,- The buyer of the put contracts will not exercise them since the market price exceeds
the strike price. Why sell shares for less than the market value? Thus, your total profit
equals the option premium you received as the option writer.
- Total profit = 10 × 100 × $.40 = $400
✔✔Modern Windows issued warrants for one share per warrant with an exercise price
of $21. On May 1, the common stock is selling for $23 a share. The lower and upper
limits on the warrant value on this date are: - ✔✔- ANSD. $2 and $23.
- Lower limit = MAX[0,(Stock price - Exercise price)] = MAX[0,($23 -21)] Lower limit = $2
Upper limit = Stock price Upper limit = $23
✔✔A convertible bond matures in 15 years, pays annual coupons, and has a coupon
rate of 8 percent. The face value is $1,000 and the conversion ratio is 40. The stock
currently sells for $22.80 a share. Similar nonconvertible bonds are priced to yield 9
percent. The value of the convertible bond is at least: - ✔✔- $919.39.
- Straight bond value = Coupon payment × PVIFAr, t + Face value / (1 + r)t Straight
bond value = (.08 × $1,000) × ((1 / .09) - {1 / [.09(1 + .09)15]}) + $1,000 / (1 + .09)15
Straight bond value = $919.39 Conversion value = Conversion ratio × Price per share
Conversion value = 40 × $22.80 Conversion value = $912.00 Assuming there is no
option premium: Bond value = MAX[Straight bond value, Conversion value] Bond value
= MAX[$919.39, 912.00] Bond value = $919.39
✔✔Convertible bonds: A. are secured by shares of common stock. - ✔✔- ANSD. are
generally issued by firms that have lower bond ratings than the average firm. E. are
generally granted seniority over all other bonds.
✔✔Bright View Windows issued warrants with an exercise price of $17. Bright View's
common stock currently sells for $16 per share. The warrants are: - ✔✔Out of the
money
✔✔The gain from exercising a warrant is _____ the gain from exercising a comparable
call option. ANS$$ANSA. less than - ✔✔NO ANSWER
✔✔SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of
stock. Assume SBX declares a 3-for-1 stock split. What conversion price will be needed
following the stock split for the conversion value and the straight bond value to be equal
assuming the bond continually sells at par? - ✔✔- $16.67
- Conversion value = Straight bond value = Par value Conversion value = $1,000
Conversion price = Conversion value / Number of shares Conversion price = $1,000 /
[20 × ()] Conversion price = $16.67
✔✔Looper Industries has 400,000 shares of stock outstanding with a market price of
$32 a share. The firm also has 10,000 bonds outstanding with a face value of $1,000
and a conversion price of $40. The bonds mature tomorrow. You currently own 25,000
, shares of this stock and no bonds. What percent ownership in the firm should you
expect to have after tomorrow? A. 3.52% - ✔✔- ANSD. 6.25%
- The bonds will be submitted for redemption and not converted because the conversion
price exceeds the stock price. Percentage ownership = Number of shares owned / Total
shares Percentage ownership = 25,,000 Percentage ownership = .0625, or
6.25%
✔✔If the producer of a product has entered into a fixed price sale agreement for that
output, the producer faces: - ✔✔an uncertain profit if the input prices are volatile. This
risk can be reduced by a long hedge.
✔✔Suenette wants to own bonds but also wants their market values to remain as
steady as possible. Which type of bonds are best suited to her wishes? - ✔✔High
coupon, short term
✔✔Which one of these bonds has the lowest percentage price change for a stated shift
in interest rates? - ✔✔5-year high coupon
✔✔A miller who needs wheat to mill into flour most likely uses the futures market for
taking a: - ✔✔long hedge position to lock in production costs.
✔✔Futures market transactions are commonly used to reduce risk. The most risk
reduction can be obtained when the asset at risk and the futures contract: - ✔✔have
perfectly correlated price movements.
✔✔Prepackaged bankruptcies: - ✔✔area combination of a private workout and legal
bankruptcy.
✔✔Altman develop the Z-score model for publicly traded manufacturing firms. Using
financial statement data and multiple discriminant analysis, he found that: - ✔✔in actual
use, a Z-score of less than 1.81 would predict bankruptcy within one year.
✔✔Which one of these statements correctly identifies a condition which must be met for
creditors to force a firm into involuntary bankruptcy? - ✔✔If there are more than a dozen
creditors, then at least 3 with claims totaling $13,475 or more must participate in the
filing.
✔✔Section 363 as it relates to a bankruptcy filing - ✔✔works like an auction to speed
up the bankruptcy process.
✔✔Pat's Boats is being liquidated. The administrative costs of liquidation, taxes, and
wage payments are expected to be $450,000. Secured creditors have a mortgage lien
for $1.4 million on the real estate which was just liquidated and netted proceeds of $1.2
million. The other secured creditors have submitted claims totaling $274,000 and the
