Question

11. Complete the following: A put option gives you _____________?

a.   The right to buy an asset at a specified price

b.   The right to sell an asset at a specified price

c.   The right to buy an asset at the market price

d.   The right to sell an asset at the market price

12. Which of the following methods should be used when faced with capital rationing?

a.   payback period

b.   internal rate of return

c.   profitability index

d.   equivalent annual annuity

13. An investor owns a call option with a strike price of $45, the premium paid was $4. The share price on the option expiration date is $42, which of the below statements is correct?

a.   The option should be allowed to lapse

b.   The loss on the option is $7

c.   The intrinsic value of the option is -$3

d.   The profit on the option is $7

14. In making a decision on how to act, the Institute of Business Ethics recommends three tests. What are they?

a. Transparency, Effect and Honesty

b.   Honesty, Integrity and Transparency

c.   Transparency, Effect and Fairness

d.   Traceability, Effect and Fairness

15. The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that the bills:

a.   have more price volatility

b.   have a shorter maturity at the time of issue

c.   offer a significantly higher return

d.   do not have default risk

Answer 1

Solution:

11.) A put option gives the right to sell at the strike price while a call option gives the right to buy at the specified strike price.

Hence correct option is b. ) The right to sell an asset at a specified price

12.)

In capital rationing situation the common method is the profitability index. PI = PV of future cash flow / Initial investment

Hence the correct option is c) profitability index

13.) The strike price of the call option is $45 and the premium paid is $4. This option will be exercisable when the spot price is more than $45. In the given statement the price at the time of expiry is $42 so the option will expire worthlessly. The loss will be the premium paid i.e. $4. The intrinsic value of the option is zero as the spot price < Strike price

Hence the correct option is a.) The option should be allowed to lapse

14) Institute of Business Ethics recommends three tests - Transparency, Effect, and Fairness

Hence correct option is C )

15) Treasury bills are the instruments that have shorter maturity( less than a year) and treasury bonds have higher maturity.

Hence correct option is B )