CH17 TB HYBRID AND DERIVATIVE SECURITIES Flashcards
(T/F) Derivatives are used by corporations as a useful tool for managing certain aspects of a firm’s risk.
TRUE
(T/F) Preferred stock is considered a hybrid security because it blends the characteristics of both debt and
equity.
TRUE
(T/F) An option derives its value from an underlying asset that is often another security.
TRUE
(T/F) A hybrid security is neither debt nor equity but instead derives its value from an underlying asset.
FALSE
(T/F) A hybrid security is a form of debt or equity financing that possesses characteristics of both debt and
equity.
TRUE
(T/F) A derivative security is neither debt nor equity but instead derives its value from an underlying asset.
TRUE
Which of the following securities is a popular hybrid security?
A) preferred stock
B) common stock
C) options
D) futures
A
A form of debt or equity that possesses characteristics of both debt and equity financing is called
________.
A) hybrid security
B) convertible security
C) derivative security
D) cumulative security
A
In their simplest form, bonds are pure ________.
A) debt
B) equity
C) hybrid security
D) current assets
A
A(n) ________ is neither debt nor equity but derives its value from an underlying asset.
A) derivative security
B) hybrid security
C) financing lease
D) operating lease
A
(T/F) A lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the
assets that are being leased.
TRUE
(T/F) A lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the
assets that are being leased.
FALSE
(T/F) Leasing is considered a source of financing provided by the lessee to the lessor.
FALSE
(T/F) An operating lease is often referred as a capital lease.
FALSE
(T/F) financial lease is often referred as a capital lease.
TRUE
(T/F) If a lessee leases (under a financial lease) an asset that subsequently becomes obsolete, it can require the
lessor to replace it with an equally productive asset in real term over the remaining term of the lease.
FALSE
(T/F) An operating lease is noncancellable and obligates the lessee to make payments for the use of an asset
over a predefined period of time.
FALSE
(T/F) A financial lease is a cancelable contractual arrangement whereby the lessee agrees to make periodic
payments to the lessor, often for five or fewer years, for an asset’s services.
FALSE
(T/F) In a financial lease, the lessor must receive more than the asset’s purchase price in order to earn its
required return on the investment.
TRUE
(T/F) A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then
leases back the same asset, making fixed periodic payments for its use.
FALSE
(T/F) Maintenance clauses are provisions normally included in an operating lease that require the lessor to
maintain the assets and to make insurance and tax payments.
TRUE
(T/F) Renewal options normally require the lessor to maintain the assets and to make insurance and tax
payments.
FALSE
(T/F) Renewal options are provisions normally included in an operating lease that grant the lessee the right
to re-lease assets at the expiration of the lease.
TRUE
(T/F) Purchase options are provisions frequently included in both operating and financial leases that allow
the lessee to purchase the leased asset at maturity.
TRUE
(T/F) Renewal options are provisions frequently included in both operating and financial leases that allow
the lessee to purchase the leased asset at maturity.
FALSE
(T/F) A leveraged lease is a lease under which the lessee sells an asset for cash to a prospective lessor and
then leases back the same asset, making fixed periodic payments for its use.
FALSE
(T/F) An operating lease is when the present value of all its payments included as an asset and
corresponding liability on a firm’s balance sheet.
TRUE
(T/F) If a lease meets any of the FASB Standards No. 13 criteria, it should be shown as a capitalized lease,
meaning the present value of all its payments should be included as an asset and corresponding liability
on a firm’s balance sheet.
TRUE
(T/F) An operating lease need not be capitalized, but its basic features must be disclosed in a footnote to the
financial statements.
TRUE
(T/F) Since operating leases result in the receipt of services from an asset without increasing the assets or
liabilities on a firm’s balance sheet, leasing may result in misleading financial ratios.
TRUE
(T/F) At the end of the term of the lease agreement, the terminal value of an asset, if any, is realized by the
lessee.
FALSE
(T/F) When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the
corporation is three years of lease payments.
TRUE
(T/F) Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.
TRUE
(T/F) A lease arrangement has many more restrictive covenants than those that are normally included as
part of a long-term loan.
FALSE
(T/F) One advantage of leasing is that in many cases, the return to the lessor is quite low so the firm in need
of an asset might be better off borrowing to purchase it.
FALSE
high
(T/F) One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in
need of an asset might be better off borrowing to purchase it.
TRUE
A(n) ________ lease is a contractual arrangement whereby the lessee agrees to make periodic
payments to the lessor for five or fewer years for an asset’s services. This type of lease may also be
canceled at the option of the lessee.
A) financial
B) operating
C) capital
D) direct
B
Assets leased under ________ leases generally have a usable life longer than the term of the lease.
A) financial
B) operating
C) capital
D) direct
B
________ leases are noncancellable and are generally used for leasing land, buildings, and large pieces
of fixed equipment.
A) Financial
B) Operating
C) Leveraged
D) Direct
A
The total payments of ________ lease over the lease period are greater than the initial cost of the
leased asset to the lessor.
A) a financial
B) an operating
C) a leveraged
D) a direct
A
Under FASB Standard No. 13, which of the following element should be present to qualify as a capital
lease?
A) The lease does not transfer ownership of the property to the lessee by the end of the lease.
B) The lease contains an option to purchase the property at a “bargain” price.
C) The lease term is less than 50 percent of the economic life of the property.
D) At the beginning of the lease, the present value of the lease payment is equal to 50 percent or more of
the fair market value of the leased property less any investment tax credit received by the lessor.
B
FASB Standard No. 13 requires explicit disclosure of ________ obligation on the firm’s balance sheet.
A) an operating lease
B) a leveraged lease
C) a sale-leaseback
D) a capital lease
D
A(n) ________ is a cancelable contractual arrangement whereby the lessee agrees to make periodic
payments to the lessor, often for 5 or fewer years, to obtain an asset’s services.
A) operating lease
B) financial lease
C) capital lease
D) direct lease
A
A(n) ________ is a noncancellable arrangement that requires the lessee to make payments for the use
of an asset over a relatively long period of time.
A) operating lease
B) financial lease
C) sale-leaseback arrangement
D) direct lease
B
A capital or capitalized lease is also known as ________.
A) an operating lease
B) a financial lease
C) a direct lease
D) a leveraged lease
B
A ________ is normally initiated by a firm that needs funds for operations. Here, lessors acquire
leased assets by purchasing assets already owned by the lessee and leasing them back.
A) direct lease
B) leveraged lease
C) sale-leaseback
D) mortgage
C
In a(n) ________ a lessor owns or acquires the assets that are leased to a given lessee.
A) operating lease
B) financial lease
C) sale-leaseback arrangement
D) direct lease
D
A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the
same asset is called a(n) ________.
A) operating lease
B) leveraged lease
C) sale-leaseback arrangement
D) direct lease
C
A lease under which a lessor acts as an equity participant, supplying only about 20 percent of the cost
of the asset, while a lender supplies the balance is called a(n)________.
A) operating lease
B) leveraged lease
C) sale-leaseback arrangement
D) direct lease
B
In a ________, the lessor acts as an equity participant supplying part of the necessary capital while a
lender supplies the remaining balance.
A) direct lease
B) leveraged lease
C) sale-leaseback
D) mortgage
B
A type of lease in which the lessor acquires or purchases the asset in order to lease to a given lessee is
known as ________.
A) a mortgage
B) a direct lease
C) a sale-leaseback arrangement
D) a leveraged lease
B
Which of the following must be considered when making a lease-versus-purchase decision?
A) the before-tax cash outflows for each year under the lease alternative
B) the before-tax cash outflows for each year under the purchase alternative
C) the after-tax cash outflows for each year under the lease alternative
D) the depreciation expense under the lease
C
The consequences of missing a financial lease payment are ________ those of missing an interest or
principal payment on debt.
A) less severe than
B) the same as
C) more severe than
D) unrelated to
B
Which of the following is a disadvantage of leasing from a lessee’s perspective?
A) capability of effectively depreciating land
B) ability to avoid restrictive covenants that are normally part of a long-term loan
C) benefit of the salvage value at the end of the term of the lease reverts to the lessor
D) 100 percent debt financing
C
Which of the following is an advantage of leasing from a lessee’s perspective?
A) The return to the lessor is quite high.
B) prohibition on leasehold improvements
C) Maximum claim of the lessor in the event of bankruptcy is ten years of lease payments.
D) Maximum claim of the lessor in the event of bankruptcy is three years of lease payments.
D
47) Dwyer Corporation is determining whether to lease or purchase new equipment. The firm is in the
38% tax bracket, and its after-tax cost of debt is currently 7%. The terms of the lease and the purchase are:
Lease: Annual end-of-year lease payments of $31,500 are required over the 3-year life of the lease. All
maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The
lessee will exercise its option to purchase the equipment for $6,000 at the termination of the lease.
Purchase: The equipment, costing $77,000, can be financed entirely with a 12% loan requiring annual end
of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3
year recovery period (33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). The firm will pay
$2,000 per year for a service contract that covers maintenance costs; insurance and other costs will be
borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period.
Calculate the present value of the cash outflow for both the lease and purchasing and recommend one
alternative.
A) The present value of the cash outflow for the lease is $56,151 and for purchasing is $56,775, therefore
Dwyer should choose the lease.
B) The present value of the cash outflow for the lease is $56,151 and for purchasing is $56,775, therefore
Dwyer should choose purchase.
C) The present value of the cash outflow for the lease is $64,590 and for purchasing is $65,398, therefore
Dwyer should choose the lease.
D) The present value of the cash outflow for the lease is $51,178 and for purchasing is $51,703, therefore
Dwyer should choose the lease.
A
(T/F) A conversion feature is an option that is included as part of a common stock issue that allows its holder
to change the stock into a stated number of shares of preferred stock.
FALSE
(T/F) The conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible
security.
FALSE
(T/F) Diluted earnings per share (EPS) are found by adjusting basic EPS for the impact of converting all
convertibles and exercising all warrants and options that would have diluting effects on a firm’s earnings.
TRUE
(T/F) The presence of contingent securities such as warrants and stock options affects the reporting of a
firm’s earnings per share.
TRUE
(T/F) The conversion ratio can be obtained by dividing the par value of the convertible by the conversion
price.
TRUE
(T/F) The conversion value is the value of a convertible security as measured by the market price of the
common stock into which it can be converted.
TRUE
(T/F) Contingent securities such as convertibles, warrants, and stock options affect the reporting of a firm’s
earnings per share (EPS).
TRUE
(T/F) Common stock equivalents are all contingent securities that derive a major portion of their value from
their conversion privileges or common stock characteristics.
TRUE
(T/F) Contingent securities such as common stocks and bonds affect the reporting of a firm’s earnings per
share (EPS).
FALSE
(T/F) Convertibles can normally be sold with lower interest rates than nonconvertibles.
TRUE
(T/F) The conversion feature permits a firm’s capital structure to be changed without increasing the total
financing.
TRUE
(T/F) By using convertible bonds, an issuing firm can temporarily raise debt, which is typically less
expensive than common stock, to finance projects.
TRUE
(T/F) Because a security is first sold with a conversion price above the current market price of a firm’s stock,
conversion is initially not attractive.
TRUE
(T/F) Convertibles can be used as a form of deferred common stock financing.
TRUE
(T/F) Since the conversion feature provides the purchaser of a convertible bond with the possibility of
becoming a stockholder, convertible bonds are a less expensive form of financing than similar-risk
nonconvertible or straight bonds.
TRUE
(T/F) Since the purchaser of a convertible security is given an opportunity to become a common
stockholder, convertibles can normally be sold with higher interest rates than nonconvertibles.
FALSE
(T/F) In case of an overhanging issue, if a firm were to call the issue, the bondholders would accept the call
price rather than converting their bonds.
TRUE
(T/F) One motive for issuing convertibles is that convertible securities can be issued with far fewer
restrictive covenants than nonconvertibles.
TRUE
(T/F) An overhanging issue is a convertible security that cannot be forced into conversion by using the call
feature.
TRUE
(T/F) The conversion feature, which can be part of either a bond or preferred stock, permits a firm to raise
additional funds at some point in the future by selling common stock, thereby shifting the company’s
capital structure to a less highly levered position.
FALSE
(T/F) Converting a convertible security is beneficial when the market price of the common stock into which
it can be converted is greater than its conversion price.
TRUE
(T/F) When the market price of the common stock exceeds the conversion price, the conversion (or stock)
value exceeds the par value of the convertible security.
TRUE
Convertible preferred stock is converted into ________.
A) secured bonds
B) debentures
C) shares of common stock
D) warrants
C
A ________ is an option included as part of a bond or preferred stock that permits the holder to
convert the security into a specified number of shares of common stock.
A) put option
B) call option
C) conversion feature
D) repurchase agreement
C
Which of the following is a characteristic of convertible bonds?
A) Conversion increases a firm’s debt ratio.
B) It is a more expensive form of financing than straight bonds.
C) It enhances marketability of a firm’s bonds.
D) It is nothing but a put option.
C
Which of the following is true of conversion feature of a bond?
A) It adds a degree of speculation to a bond issue, although the issue still maintains its value as a bond.
B) It decreases the marketability and liquidity of a bond since conversion feature is perceived by the
market as a pessimistic approach about the firm’s future.
C) It is analogous to the put option, since it gives the bondholders the option to sell the bonds at any time
till maturity.
D) It increases the cost of debt financing.
A
Convertible preferred stock and convertible bonds are normally convertible over ________,
respectively.
A) a limited time period and an unlimited time period
B) an unlimited time period and a limited time period
C) a limited time period and a limited time period
D) an unlimited time period and an unlimited time period
B
At the time of issuance, the issuer of a convertible security normally establishes a conversion price
________.
A) below the current book value of the firm’s stock
B) equal to the current market price of the firm’s stock
C) above the current market price of the firm’s stock
D) above the current book value of the firm’s stock
C
A ________ permits a firm’s capital structure to be changed without increasing the total financing.
A) put option
B) call option
C) conversion feature
D) repurchase agreement
C
Convertible bonds normally have ________ to permit the issuer to retire or encourage conversion of
outstanding convertibles when appropriate.
A) a put feature
B) a call feature
C) a stock purchase warrant
D) a swap feature
B
Convertible securities can usually be sold with interest rates ________.
A) lower than those of other nonconvertible securities
B) equal to those of other nonconvertible securities
C) higher than those of other nonconvertible securities
D) that has no relation to those of other nonconvertible securities
A
A ________ allows a firm to force conversion.
A) warrant
B) option
C) call feature
D) striking price
C
A convertible security that cannot be forced into conversion using the call feature is ________.
A) a general obligation bond
B) a debenture
C) an overhanging issue
D) a noncallable common equity issue
C
Many holders of convertible bonds will not convert when the firm’s common stock price exceeds the
conversion price. To protect itself against this behavior, the firm includes a ________ on the convertible
security.
A) warrant
B) option
C) call feature
D) striking price
C
The call price of a security ________ the security’s par value.
A) is less than
B) is equal to
C) is greater than
D) is less than or equal to
C
The purchaser of a convertible issue sacrifices a portion of his or her interest return ________.
A) to raise temporarily cheap funds
B) due to the reduced risk of default in the future
C) when the call feature is exercised
D) to become a common shareholder in the future
D
An advantage of a convertible security is that it provides deferred common stock financing. The
purpose of deferring the sale of common stock is to ________.
A) increase the leverage of the firm
B) dilute the ownership interest
C) minimize dilution in earnings per share
D) time the sale of common stock when the price per share is increasing
C
Convertible securities can be issued ________.
A) with an intention to raise cheap funds permanently
B) with higher rates of interest than nonconvertibles
C) to raise funds without affecting the capital structure
D) with far fewer restrictive covenants than nonconvertibles
D
When the price of a firm’s common stock ________ the conversion price, the market price of the
convertible security will ________ to a level close to its conversion value.
A) falls below; rise
B) rises above; fall
C) rises above; rise
D) equals; fall
C
Many holders of convertible bonds will not convert when the firm’s common stock price exceeds the
conversion price because ________.
A) the common stock price may go up further and the firm cannot have any other mechanism to stop the
bondholders from taking undue advantage of the conversion feature
B) they already have the market price benefit and may still receive fixed periodic interest payments
C) of the dilution of EPS
D) interest payments are tax deductible and it will affect their earnings
B
The call price of a security generally exceeds the security’s par value by an amount equal to ________.
A) one year’s stated interest
B) the straight bond value
C) the market value of one share of common stock
D) the market premium
A
The call privilege is generally not exercised until the conversion value of a security is ________ the call
price.
A) 5 to 10 percent below
B) equal to
C) 10 to 15 percent above
D) 50 percent above
C
When a call is made on a convertible security, the holder of the security will most likely ________.
A) not take any action
B) allow the call to be exercised and accept the call premium if the conversion value is 10% above the call
price
C) convert the security into common stock if the conversion value is 10% above the call price
D) sell the security in the secondary market
C
Which of the following is a motive for using convertible securities in a firm’s financing mix?
A) a form of long-term financing
B) opportunity bondholders to share in the firm’s future success
C) a method of raising permanent cheap funds for long time
D) an eventual shift in the capital structure to a more levered position
B
From a firm’s point-of-view, which of the following is true of issuance of convertible bonds?
A) It acts as a permanent source of cheap funds.
B) It results in a non-tax-deductible interest payments.
C) It is an immediate sale of common stock.
D) It decreases financial leverage upon conversion.
D
(T/F) The conversion value of a bond is the minimum price at which a convertible bond would be traded.
FALSE
(T/F) The market premium may be defined as the amount by which the conversion value exceeds its
straight value.
FALSE
(T/F) The market value of a convertible security is likely to be greater than its straight value or conversion
value.
TRUE
(T/F) The market value of a convertible security is likely to be less than its straight value or conversion
value.
FALSE
________ is the price at which a bond would sell in the market without the conversion feature.
A) Conversion value
B) Straight bond value
C) Strike price value
D) Market premium
B
A straight bond value is the ________.
A) minimum price at which a convertible bond would be traded
B) optimum price at which a callable bond would be traded
C) maximum price at which a callable bond would be traded
D) average price at which a convertible bond would be traded
A
The straight bond value is ________.
A) the conversion premium minus the conversion value
B) the present value of the interest and principal payments discounted at a rate the firm would have to
pay on a convertible bond
C) the market value minus the conversion value
D) the present value of the interest and principal payments discounted at a rate the firm would have to
pay on a nonconvertible bond
D
The market value of a convertible bond will exceed the conversion value or straight bond value,
whichever is greater, by an amount called the market premium. This premium exists because ________.
A) markets are efficient
B) buyers and sellers do not usually agree on the conversion value
C) purchasers expect future stock price movements to be positive
D) the straight bond value is close to the conversion value
C
A firm currently has outstanding a 9 percent, $1,000 convertible bond. The bond is convertible into
100 shares of common stock at a conversion price of $10 per share and callable at $1,090. The current
market price of the firm’s stock is $12 per share. The bond holder will ________.
A) allow the call to be exercised realizing $90 over par value
B) convert the bond into stock realizing $200 over par value
C) convert the bond into stock realizing only par value
D) wait until the stock price goes up further
B
A firm currently has outstanding a 5 percent, $1,000 convertible bond. The bond is convertible into 25
shares of common stock and callable at $1,050. The current market price of the firm’s stock is $41 per
share. The bond holder will ________.
A) allow the call to be exercised
B) convert the bond into stock
C) sell the bond on the secondary market
D) do nothing and wait until the stock price goes up further
A
(T/F) A stock purchase warrant gives the holder the right to purchase a certain number of shares of common
stock at a specified price over a certain period of time.
TRUE
(T/F) Contrary to convertibles, warrants provide for the injection of additional equity capital into a firm
immediately.
FALSE
(T/F) The exercise price or option price of a warrant is normally set below the market price of the firm’s stock
at the time of issuance.
FALSE
(T/F) Unlike convertible securities, warrants cannot be called, but their limited life stimulates holders to
exercise them when the exercise price is below the market price of the firm’s stock.
TRUE
(T/F) In comparison to convertibles, the exercise of a warrant shifts the firm’s capital structure to a less
highly levered position.
TRUE
(T/F) Both warrants and rights result in new capital equity. However, warrants are issued at an exercise
price below the prevailing market price of the stock, whereas rights are issued at a subscription price
above the prevailing market price.
FALSE
(T/F) One of the major reasons for attaching a stock purchase warrant is that investors do not require the
issuing firm to pay an interest rate as high as on a security that does not have an attached warrant.
TRUE
(T/F) One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a
higher interest rate if a warrant is attached than if it is not.
FALSE
(T/F) A detachable stock purchase warrant means that the bondholders may sell the warrant without selling
the security to which it is attached.
TRUE
(T/F) All stock purchase warrants are non-detachable, which means that the bondholders must keep the
warrants until they mature.
FALSE
(T/F) A stock purchase warrant permits a firm to raise additional funds at some point in the future by
selling common stock and thereby shifting the firm’s capital structure to a less highly levered position.
TRUE
(T/F) The market value of a warrant is generally below the theoretical value of the warrant.
FALSE
(T/F) A warrant premium depends largely on investor expectations and on the ability of investors to get
more leverage from the warrants than from the underlying stock.
TRUE
A ________ gives the holder an option to purchase a certain number of shares of common stock at a
specified price over a certain period of time.
A) put option
B) convertible bond
C) stock purchase warrant
D) repurchase agreement
C
A ________ permits the firm to raise additional funds at some point in the future by selling common
stock and thereby shifting the firm’s capital structure to a less highly levered position.
A) put option
B) stock purchase warrant
C) conversion feature
D) repurchase agreement
B
Majority of actively traded warrants are listed on the ________.
A) NASDAQ
B) American Stock Exchange
C) New York Stock Exchange
D) Singapore Stock Exchange
B
The exercise price or option price of a warrant is normally set ________.
A) below the book value of the firm’s stock at the time of issuance
B) equal to the market price of the firm’s stock at the time of issuance
C) above the market price of the firm’s stock at the time of issuance
D) above the book value of the firm’s stock at the time of issuance
C
Which of the following is a basic characteristic of warrants?
A) It improves the marketability of an issue.
B) It is non detachable.
C) It increases the required interest rate.
D) It has an exercise period shorter than one month.
A
When warrants are used as “sweeteners” by a new firm, the firm is essentially allowing creditors to
________.
A) vote along with common stockholders
B) share the possible future success of the firm
C) protect their interest
D) receive extra income
B
Which of the following is true of a stock right and a warrant?
A) They are similar to a put option.
B) They both result in new equity capital for a firm.
C) They are both issued with exercise or subscription prices below the prevailing market price of stock.
D) They both may be traded independently from the security to which they were attached.
C
When warrants are exercised, ________.
A) only the number of common shares outstanding increases
B) debt is increased
C) both debt and equity are reduced
D) there is no effect on the firm’s capital structure
A
Which the following is true of stock purchase warrants?
A) When a firm makes a large issue of debt, the attachment of stock purchase warrants may deteriorate
the marketability of the issue.
B) Warrants are similar to conversion features on debt.
C) Suppliers of debt are more likely to require warrants on an issue of debt from an existing corporation
than from a new firm.
D) The attachment of warrants increases the required interest rate.
B
The effect of exercising a warrant on a firm’s capital structure ________.
A) reduces leverage less than a converting a convertible security
B) increases leverage as much as a converting a convertible security
C) reduces leverage more than a converting a convertible security
D) is unrelated to a converting a convertible security
A
The market value of a warrant is ________ the theoretical value of the warrant.
A) below
B) equal to
C) above
D) less than or equal to
C
As the price of the underlying stock falls below the exercise price of a warrant, the investor’s ability to
earn larger potential return diminishes. Therefore, the warrant premium will ________.
A) increase
B) decrease
C) remain unchanged
D) double
B
(T/F) Options are a special type of security that provides the holder with the right to purchase or sell
specified assets at a stated price on or before a set expiration date.
TRUE
(T/F) A strike price is a price at which the holder of a call option can buy a specified amount of stock at any
time prior to the option’s expiration date.
TRUE
(T/F) An option buyer who expects a stock price to decline will purchase a put option.
TRUE
(T/F) A call option is an option to sell a specified number of shares of a stock on or before some future date at
a stated price.
FALSE
(T/F) Call options are purchased with the expectation that the market price of the underlying security will
rise while put options are purchased with the expectation that the market price of the underlying security
will fall.
TRUE
(T/F) Call options are sold with the expectation that the market price of the underlying security will fall
while put options are sold with the expectation that the market price of the underlying security will rise.
TRUE
(T/F) The dominant organized options exchange in which options are traded is the Chicago Board Options
Exchange (CBOE).
TRUE
(T/F) A firm can raise capital by issuing securities such as convertibles and warrants but options do not
typically raise new capital for firms.
TRUE
(T/F) A firm can raise capital by issuing securities such as convertibles, warrants, and calls and puts.
FALSE
Which of the following statements about put and call options is true?
A) They are traded only over-the-counter.
B) They are a form of deferred equity financing by a firm.
C) They can be used to lock in a gain or prevent a loss on a stock holding.
D) They provide the seller with an opportunity to earn larger returns than simply buying or selling
common stock.
C
Options are the most popular type of ________.
A) derivative security
B) hybrid security
C) convertible security
D) fixed interest bearing security
A
For puts and calls, the exercise price is called ________.
A) the expected value
B) the market price of the stock
C) the strike price
D) the option price
C
A ________ option is an option to purchase a specified number of shares of a stock on or before some
future date at a specified price, whereas a ________ option is an option to sell a specified number of
shares of a stock on or before some future date at a specified price. ________ are purchased if the stock
price is expected to fall.
A) put; call; Puts
B) call; put; Puts
C) put; call; Calls
D) call; put; Calls
B
The dominant organized options exchange is the ________.
A) over-the-counter exchange
B) CBOE
C) NASDAQ
D) NYSE
B
The option buyer who expects a stock price to decline will purchase ________.
A) a call
B) a warrant
C) a put
D) a convertible bond
C
