Q6. Johnson asks Wall to compute the value of the call option. Using the given information what is the value of the embedded call option?

A)   $1.21.

B)   $2.04.

C)   $0.00.

Q7. Wall is a little confused over the relationship between the embedded option and the callable bond. How does the value of the embedded call option change when interest rate volatility increases? The value:

A)   may increase or decrease.

B)   decreases.

C)   increases.

Q8. Wall wonders how the value of the callable bond changes when interest rate volatility increases. How will an increase in volatility affect the value of the callable bond? The value:

A)   decreases.

B)   increases.

C)   may increase or decrease.

Q9. Wall now turns his attention to the value of the embedded call option. How does the value of the embedded call option react to an increase in interest rates? The value of the embedded call:

A)   increases.

B)   decreases.

C)   remains the same.

Q10. Wall believes he understands the relationship between interest rates and straight bonds but is unclear how callable bonds change as interest rates increase. How do prices of callable bonds react to an increase in interest rates? The price:

A)   may increase or decrease.

B)   decreases.

C)   increases.

Q11. The value of a callable bond is equal to the:

A)   callable bond value minus the value of the put option minus the value of the call option.

B)   option-free bond value minus the value of the call option.

C)   callable bond plus the value of the embedded call option.

Q12. How does the value of a callable bond compare to a noncallable bond? The bond value is:

A)   lower or higher.

B)   higher.

C)   lower.

Q13. A callable bond and an option-free bond have the same coupon, maturity and rating. The callable bond currently trades at par value. Which of the following lists correctly orders the values of the indicated items from lowest to highest?

A)   Embedded call, callable bond, zero, option-free bond.

B)   Zero, embedded call, callable bond, option-free bond.

C)   Embedded call, zero, callable bond, option-free bond.

Q14. A callable bond, a putable bond, and an option-free bond have the same coupon, maturity and rating. The call price and put price are 98 and 102 respectively. The option-free bond trades at par. Which of the following lists correctly orders the values of the three bonds from lowest to highest?

A)   Callable bond, option-free bond, putable bond.

B)   Option-free bond, putable bond, callable bond.

C)   Putable bond, option-free bond, callable bond.

[此贴子已经被作者于2009-3-18 18:02:52编辑过]

Q6. Johnson asks Wall to compute the value of the call option. Using the given information what is the value of the embedded call option? fficeffice" />

A)   $1.21.

B)   $2.04.

C)   $0.00.

Correct answer is B)

The call option value is simply the difference between the value of the callable and the non-callable bond.

Call Option Value = $100.83 ? $98.79 = $2.04 (Study Session 14, LOS 55.e)

Q7. Wall is a little confused over the relationship between the embedded option and the callable bond. How does the value of the embedded call option change when interest rate volatility increases? The value:

A)   may increase or decrease.

B)   decreases.

C)   increases.

Correct answer is C)

All option values increase when the volatility of the underlying asset increases. This is due to the asymmetric payoff of options. (Study Session 14, LOS 55.e)

Q8. Wall wonders how the value of the callable bond changes when interest rate volatility increases. How will an increase in volatility affect the value of the callable bond? The value:

A)   decreases.

B)   increases.

C)   may increase or decrease.

Correct answer is A)

The value of the callable bond decreases if the interest rate volatility inreases because the value of the embedded call option increases. Since the value of the callable bond is the difference between the value of the non-callable bond and the value of the embedded call option, its value has to decrease. (Study Session 14, LOS 55.e, f)

Q9. Wall now turns his attention to the value of the embedded call option. How does the value of the embedded call option react to an increase in interest rates? The value of the embedded call:

A)   increases.

B)   decreases.

C)   remains the same.

Correct answer is B)

Since the underlying asset to the option (the bond) decreases in value the option must decrease in value also. (Study Session 14, LOS 55.e, f)

Q10. Wall believes he understands the relationship between interest rates and straight bonds but is unclear how callable bonds change as interest rates increase. How do prices of callable bonds react to an increase in interest rates? The price:

A)   may increase or decrease.

B)   decreases.

C)   increases.

Correct answer is B)

Since the bond has a fixed coupon it becomes relatively less attractive to investors when interest rates increase. Its cash flows are now discounted at a higher discount rate which reduces the value of the bond. (Study Session 14, LOS 55.e, f)

Q11. The value of a callable bond is equal to the:

A)   callable bond value minus the value of the put option minus the value of the call option.

B)   option-free bond value minus the value of the call option.

C)   callable bond plus the value of the embedded call option.

Correct answer is B)

The value of a bond with an embedded call option is simply the value of a noncallable (V_noncallable) bond minus the value of the option (V_call). That is: V_callable = V_noncallable – V_call.

Q12. How does the value of a callable bond compare to a noncallable bond? The bond value is:

A)   lower or higher.

B)   higher.

C)   lower.

Correct answer is C)

Since the issuer has the option to call the bonds before maturity, he is able to call the bonds when their coupon rate is high relative to the market interest rate and obtain cheaper financing through a new bond issue. This, however, is not in the interest of the bond holders who would like to continue receiving the high coupon rates. Therefore, they will only pay a lower price for callable bonds.

Q13. A callable bond and an option-free bond have the same coupon, maturity and rating. The callable bond currently trades at par value. Which of the following lists correctly orders the values of the indicated items from lowest to highest?

A)   Embedded call, callable bond, zero, option-free bond.

B)   Zero, embedded call, callable bond, option-free bond.

C)   Embedded call, zero, callable bond, option-free bond.

Correct answer is B)

The embedded call will always have a positive value prior to expiration, and this is especially true if the callable bond trades at par value. Since investors must be compensated for the call feature, the value of the option-free bond must exceed that of a callable bond with the same coupon and maturity and rating.

Q14. A callable bond, a putable bond, and an option-free bond have the same coupon, maturity and rating. The call price and put price are 98 and 102 respectively. The option-free bond trades at par. Which of the following lists correctly orders the values of the three bonds from lowest to highest?

A)   Callable bond, option-free bond, putable bond.

B)   Option-free bond, putable bond, callable bond.

C)   Putable bond, option-free bond, callable bond.

Correct answer is A)

The put feature increases the value of a bond and the call feature lowers the value of a bond, when all other things are equal. Thus, the putable bond generally trades higher than a corresponding option-free bond, and the callable bond trades at a lower price.

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