1. If a newly issued convertible bond is quoted at $90 and is convertible into 2
ID: 2800667 • Letter: 1
Question
1. If a newly issued convertible bond is quoted at $90 and is convertible into 20 shares of stock , then the underlying stock will likely be trading at or below:
a. $40
b. $45
c.$100
d.$4
2. An investor buy two call options and two put options on the same security. What can you say about that person ?
a. she is expecting the market price to fluctuate significantly
b. she is trying to create a neutral hedge
c. she is most likely taking the long position because of the calls
d. she is most likely taking the short position because of the puts.
3. Assume Microsoft stock was purchased for $ 84 ( 100 shares) and sold a 3 years later for $170, in addition over the course of the year, the stock paid a cash dividend of $ 2 per share during the last year of the holding period and had a 2-for-1 split during the holding 3 year holding period. Given this information, what is $ return and the % return on the stock for the given holding period of 3 years?
A. $24, 780, 295%
b. $ 8,820, 105%
c.26,000, 310%
d. $18,060, 215 %
Explanation / Answer
1.
Bond quoted price = $90
can Convertible into = 20shares
face value = $10
underlying stock will likely be trading at or below = ($90/20shares) * $10
= $45
Answer: b
2.
If an investor buy two call options and two put options on the same security, we can simply say she is afraid of risk and so she will be trying to neutral her risk by hedging.
Answer : b
3.
$ Return = dividend + capital gain
= (100*2)shares*$2 + [$170*(100*2)shares - $84*100shares]
= $26000
% Return = $ Return / cost of shares
= $26000 / $8400
= 310%
Answer: c
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