Question

Which security should sell at a greater price?

a. A 9-year Treasury bond with a 9.00% coupon rate or a 9-year T-bond with an 8.00% coupon.

	A 9-year Treasury bond with a 9% coupon rate
	A 9-year T-bond with a 8% coupon

b. A two-month expiration call option with an exercise price of $31 or a two-month call on the same stock with an exercise price of $36.

	A two-month expiration call option with an exercise price of $31
	A two-month call on the same stock with an exercise price of $36

c. A put option on a stock selling at $56 or a put option on another stock selling at $46. (All other relevant features of the stocks and options are assumed to be identical.)

	A put option on another stock selling at $46
	A put option on a stock selling at $56

Answer 1

a) A 9-year Treasury bond with a 9% coupon rate

The bond with the higher coupon should sell at a greater price if other factors are identical.

b) A two-month expiration call option with an exercise price of $31

A call option is an option to buy the underlying stock at maturity at the agreed strike price. The option buyer would want to buy the underlying stock at a lower price as that would maximise his profit. So, he would be willing to pay a premium for a lower price.

c) A put option on a stock selling at $56

A put option is an option to sell. It is the opposite of a call option. The option buyer would want to sell the stock at a higher price to maximise his profit. So, he would be willing to pay a premium for a higher price.