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Devry FIN 351 Week 5 Homework

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Devry FIN 351 Week 5 Homework

1. Why would an investor be interested in convertible securities? (What do they offer to the investor?)

2. A convertible bond has a face value of $1,000, and the conversion price is $50 per share. The stock is selling at $42 per share. The bond pays $60 per year interest and is selling in the market for $930. It matures in 15 years. Market rates are 10 percent per year.

  1. What is the conversion ratio?
  2. What is the conversion value?
  3. What is the conversion premium (in dollars and percent)?
  4. What is the floor value or pure bond value?

3. What is meant by the exercise or strike price on an option?

4. What are two option strategies to take advantage of an anticipated decline in stock prices? (Relate one to call options and the other to put options.)

5. Look at the option quotes in Table 14–2 on page 368.

  1. What is the closing price of the common stock of SINGLE Systems?
  2. What is the highest strike price listed?
  3. What is the price of a December 20 call option?
  4. What is the price of a January 22.50 put option?

6. Assume a stock is selling for $66.75 with options available at 60, 65, and 70 strike prices. The 65 call option price is at $4.50.

  1. What is the intrinsic value of the 65 call?
  2. Is the 65 call in the money?
  3. What is the speculative premium on the 65 call option?
  4. What percentage does the speculative premium represent of common stock price?
  5. Are the 60 and 70 call options in the money?

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7. How does the concept of margin on a commodities contract differ from that of margin on a stock purchase?

8. How can using the financial futures markets for interest rates and foreign exchange help financial managers through hedging? Briefly explain, and give one example of each.

9. Sterling Jones purchases a 5,000 troy ounce contract on silver at $13.00 an ounce. At the same time he purchases an 112,000 pound sugar contract at 0.191 cents a pound. If the price of silver goes down to $12.94 at the same time the price of sugar goes up to 0.196 cents, will Sterling have an overall net gain or loss?

10. Why are stock index futures and options sometimes referred to as derivative products? Why do some investors believe derivative products make the markets more volatile? “

11. Why is it unrealistic for a portfolio manager to sell a large portion of his portfolio if he thinks the market is about to decline?