Chapter Review and Self Test Problems

14.1 Value of a Call Option Stock in the Nantucket Corporation is currently selling for $25 per share. In one year, the price will be either $20 or $30. T-bills with one year to maturity are paying 10 percent. What is the value of a call option with a $20 exercise price? A $26 exercise price?

14.2 Convertible Bonds Old Cycle Corporation (OCC), publisher of Ancient Iron magazine, has a convertible bond issue that is currently selling in the market for $950. Each bond can be exchanged for 100 shares of stock at the holder's option.

The bond has a 7 percent coupon, payable annually, and it will mature in 10 years. OCC's debt is BBB-rated. Debt with this rating is priced to yield 12 percent. Stock in OCC is trading at $7 per share.

What is the conversion ratio on this bond? The conversion price? The conversion premium? What is the floor value of the bond? What is its option value?

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