Devry FIN 351 Week 5 Quiz

Question 1
3 pts
(TCO 5) When is the best time to convert a convertible bond to common stock?

• The best time to convert is when the call price exceeds the conversion value.
• The best time to convert is after the conversion ratio decreases.
• The best time to convert is when the conversion value is below the pure bond value.
• None of the above

Question 2
3 pts
(TCO 5) Which is the conversion ratio of a $1,000 bond convertible at $30 per share? The coupon rate is 10% and the market rate 12%. This company’s common stock is currently trading at $24 per share.

• 18.52 shares
• 33.33 shares
• 66 shares
• 41.67 shares

Question 3
3 pts
(TCO 5) Which of the following is a characteristic of put and call options?

• They are contracts to buy or sell 100 shares of common stock.
• There is always a specified price.
• There is always a specified time period to exercise options.
• All of the above

Question 4
3 pts
(TCO 5) A major disadvantage of using call options to hedge a short position is that _____.

• hedging increases the risk of loss on the short sale.
• the option premium and commission reduce profit potential.
• the price of the stock may go up
• None of the above

Question 5
3 pts
(TCO 5) An investor who wishes to take advantage of a current stock price, but does not expect to have cash available until a specific date in the future, would probably use the _____ strategy to invest in options.

• hedging
• leverage
• guaranteed price
• None of the above

Question 6
3 pts
(TCO 5) Examples of financial futures include _____.

• foreign exchange and interest rate futures
• gold and foreign currencies
• corporate bonds and common stock
• None of the above

Question 7
3 pts
(TCO 5) Which of the following statements about the margin requirements on commodities contracts is NOT true?

• Use of margin is less common than trading with actual cash dollars.
• They are generally much lower than those on stock transactions.
• It is merely a good faith payment against losses.
• None of the above

Question 8
3 pts
(TCO 5) The profit of an index option is determined by _____.

• the total value of the increase in the index
• the total value of the option
• the size of the premium
• More than one above

Question 9
3 pts
(TCO 5) The margin requirement will be lower than the standard requirement on a stock index futures contract when _____.

• the stock market is declining
• the futures are used to hedge a portfolio
• the investor is establishing a speculative position
• None of the above

Question 10
3 pts
(TCO 5) The loss on option purchase is always _____.

• limited to the premium paid
• limited to the margin maintenance requirement
• the difference between the strike price and the premium paid
• None of the above