Question

Assume that the market is informatively efficient. You will find that one bond is at a discount. Which of the following applies if you invest in this bond at its market price?


Select one:
a. The return on investment is expected to remain negative in the long run.
b. The NPV of the investment is expected to be positive.
c. The NPV of the investment is expected to be zero.
d. The value of the investment is expected to remain stable over the long term.

Which of the following statements regarding the time value of a put option is true?


Select one:
a. It is obtained as the difference between the exercise price and the base value of the option.
b. The greater the uncertainty involved in the price development of its underlying asset, the lower it.
c. It is obtained as the difference between the basic value of the option and the exercise price.
d. It is greater the more uncertainty is involved in the price development of its underlying asset.

Answer 1

Answer(1): Option "b" is correct.

 The NPV of the investment is expected to be positive.

When a bond is bought at discount, it means it is being bought lower than the face value. A discount bond provides good return in the long run if issuer does not default and the bond is held till maturity. So It may have positive npv.

Answer(2): Option "a" is correct.

It is obtained as the difference between the exercise price and the base value of the option.

Time value of an option = Option premium - Intrinsic value

Intrinsic value of Put option = Exercise price (Strike) - Base price (Spot)

Intrinsic value is the value in which the Option is In the money.

Option premium is the price of the option.

Tim value of an option is very important concept in Options.