1. Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $67.

						Calls						Puts
				Strike
Option	Expiration			Price		Vol.			Last			Vol.			Last
RWJ		Mar		61			237			3.90			167			4.00
		Apr		61			177			9.75			134			8.75
		Jul		61			146			10.60			50			11.90
		Oct		61			67			11.50			18			11.15

What is the intrinsic value of a RWJ call option?

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $67.

2.

						Calls						Puts
				Strike
Option	Expiration			Price		Vol.			Last			Vol.			Last
RWJ		Mar		61			237			3.90			167			4.00
		Apr		61			177			9.75			134			8.75
		Jul		61			146			10.60			50			11.90
		Oct		61			67			11.50			18			11.15

Are the put options in the money or out of the money?

In the money or

Out of the money?

3.

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $67.

						Calls						Puts
				Strike
Option	Expiration			Price		Vol.			Last			Vol.			Last
RWJ		Mar		61			237			3.90			167			4.00
		Apr		61			177			9.75			134			8.75
		Jul		61			146			10.60			50			11.90
		Oct		61			67			11.50			18			11.15

One of the call options is clearly mispriced. Which one?

Mar Call option

Apr Call option

Oct call option

4.

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $67.

						Calls						Puts
				Strike
Option	Expiration			Price		Vol.			Last			Vol.			Last
RWJ		Mar		61			237			3.90			167			4.00
		Apr		61			177			9.75			134			8.75
		Jul		61			146			10.60			50			11.90
		Oct		61			67			11.50			18			11.15

One of the put options is clearly mispriced. Which one?

Mar put option

Apr put option

Oct put option

5.

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $33.

						Calls							Puts
				Strike
Option	Expiration			Price		Vol.			Last				Vol.			Last
Macrosoft		Feb		35			91			.83				46			1.83
		Mar		35			67			1.07				28			2.24
		May		35			28			1.35				17			2.66
		Aug		35			9			1.56				9			2.70

Suppose you buy 16 contracts of the February 35 call option. How much will you pay, ignoring commissions?

6.

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $33.

						Calls							Puts
				Strike
Option	Expiration			Price		Vol.			Last				Vol.			Last
Macrosoft		Feb		35			91			.83				46			1.83
		Mar		35			67			1.07				28			2.24
		May		35			28			1.35				17			2.66
		Aug		35			9			1.56				9			2.70

Suppose you buy 16 contracts of the February 35 call option. Macrosoft stock is selling for $36 per share on the expiration date.

How much is your options investment worth?

7.

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $33.

						Calls							Puts
				Strike
Option	Expiration			Price		Vol.			Last				Vol.			Last
Macrosoft		Feb		35			91			.83				46			1.83
		Mar		35			67			1.07				28			2.24
		May		35			28			1.35				17			2.66
		Aug		35			9			1.56				9			2.70

Suppose you buy 16 contracts of the August 35 put option.

What is your maximum gain?

8.

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $33.

						Calls							Puts
				Strike
Option	Expiration			Price		Vol.			Last				Vol.			Last
Macrosoft		Feb		35			91			.83				46			1.83
		Mar		35			67			1.07				28			2.24
		May		35			28			1.35				17			2.66
		Aug		35			9			1.56				9			2.70

Suppose you buy 16 contracts of the August 35 put option.

On the expiration date, Macrosoft is selling for $29 per share. What is your net gain?

9.

A $1,000 par convertible debenture has a conversion price for common stock of $45 per share. With the common stock selling at $54, what is the conversion value of the bond?

10.

The following facts apply to a convertible bond making semiannual payments:

Conversion price	$	38	/share
Coupon rate		4.6	%
Par value	$	1,000
Yield on nonconvertible debentures of same quality		5	%
Maturity		30	years
Market price of stock	$	37	/share

What is the minimum price at which the convertible should sell?

11.

You have been hired to value a new 20-year callable, convertible bond. The bond has a coupon rate of 8.4 percent, payable semiannually, and its face value is $1,000. The conversion price is $67, and the stock currently sells for $54.

What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 9 percent.

12.

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $327,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,770,000. The cost of the machine will decline by $110,000 per year until it reaches $1,220,000, where it will remain.

If your required return is 13 percent, calculate the NPV today.

13.

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $327,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,770,000. The cost of the machine will decline by $110,000 per year until it reaches $1,220,000, where it will remain.

If your required return is 13 percent, calculate the NPV for today ( you did this in the previous question) and then in years 1, 2, and 3. Use the numbers to answer: When should you purchase the new machine?

Today

One year from now

Two years from now

Three years from now

14.

Starset, Inc., has a $1,000 face value convertible bond issue that is currently selling in the market for $890. Each bond is exchangeable at any time for 37 shares of the companys stock. The convertible bond has a 5.2 percent coupon, payable semiannually. Similar nonconvertible bonds are priced to yield 9 percent. The bond matures in 10 years. Stock in the company sells for $23 per share.

What is the straight bond value?

15.

Starset, Inc., has a $1,000 face value convertible bond issue that is currently selling in the market for $890. Each bond is exchangeable at any time for 37 shares of the companys stock. The convertible bond has a 5.2 percent coupon, payable semiannually. Similar nonconvertible bonds are priced to yield 9 percent. The bond matures in 10 years. Stock in the company sells for $23 per share.

What is the conversion value?