Question 1

The conversion premium will be large:

Accepted Answer

A)   if investors have great expectations for the price of the common shares.
B)   if interest rates decline.
C)   when the conversion value is much greater than the pure bond value.
D)   when the share price is very stable.E) None of the above
F) B) and C)

Question 2

Which of the following is true?

Accepted Answer

A)   As the price of common stock increases,the market price of a convertible bond and the conversion premium increase.
B)   As the price of common stock increases,the market price of a convertible bond and the conversion value increase.
C)   As the price of common stock increases,the conversion value and the floor price increase.
D)   As the book value of common stock increases,the market price of a convertible bond and the conversion premium increase.E) A) and B)
F) B) and C)

Question 3

Earnings per share (basic)may not include the dilutive effects of all of a firm's convertible bonds.

Accepted Answer

A) True 
 B)False

Question 4

The use of a derivative contract can be set up to remove all the risk from a commercial transaction.

Accepted Answer

A) True 
 B)False

Question 5

A common stock equivalent is considered to be any security convertible into common stock.

Accepted Answer

A) True 
 B)False

Question 6

The conversion premium will be small:

Accepted Answer

A)   if investors have low expectations for the price of the common stock.
B)   if interest rates decline.
C)   when the conversion value is much greater than the pure bond value.
D)   when the stock price is very stable.E) B) and C)
F) A) and D)

Question 7

Conversion price is usually set _______ the prevailing market price of the common stock at the time the bond issue is sold.

Accepted Answer

A)   at
B)   below
C)   above
D)   at one half ofE) A) and B)
F) B) and C)

Question 8

If you purchased a convertible bond when first issued,you would pay more for the shares of stock you are entitled to than if you purchased the shares directly on the market at that point in time.

Accepted Answer

A) True 
 B)False

Question 9

The floor price of a convertible bond is determined by:

Accepted Answer

A)   the conversion ratio.
B)   the conversion price.
C)   the conversion premium.
D)   its value as either equity or debt.E) A) and D)
F) A) and C)

Question 10

FC reported earnings of $12,000,000.During the year FC issued a convertible bond that could be,if fully converted,increase FC's shares outstanding by 575,000.If FC currently has 4,800,000 shares outstanding and the after-tax cost of the convertible bonds is $850,000,what is FC's diluted EPS?

Accepted Answer

A)   $2.50
B)   $2.39
C)   $2.89
D)   $3.48E) C) and D)
F) A) and B)

Question 11

Generally,once a convertible bond trades at a certain premium to its intrinsic value,or at a certain multiple of its conversion price,the bond must be converted into common stock.

Accepted Answer

A) True 
 B)False

Question 12

The minimum theoretical value of a warrant to buy 5 shares of ACD stock at $45 per share is $10.What is the current market price of ACD stock?

Accepted Answer

A)   $45.50
B)   $50.00
C)   $47.00
D)   $37.50E) A) and D)
F) None of the above

Question 13

A $1,000 par value bond with a conversion price of $20 has a conversion ratio of:

Accepted Answer

A)   $50.
B)   $20.
C)   50 shares.
D)   20 shares.E) None of the above
F) C) and D)

Question 14

A warrant's speculative premium equals the market price of the underlying common stock minus the option price.

Accepted Answer

A) True 
 B)False

Question 15

Beck Corp. (BC)  has a convertible bond issue outstanding. Each $1,000 in bond outstanding can be converted into 20 common shares. BC's non-convertible bonds have a coupon of 4% paid annually and mature in 15 years. BC's common stock is currently trading at $38 a share and its convertible bonds are trading at $1,100.
-BC's convertible bond has a conversion value of _______.

Accepted Answer

A)   $1,100
B)   $1,000
C)   $760
D)   $340E) A) and B)
F) A) and C)

Question 16

Warrants as compared to convertible bonds:

Accepted Answer

A)   provide a regular return.
B)   do not trade at a speculative premium.
C)   are sold without the company's consent.
D)   provide the company with cash flow when exercised (converted) .E) B) and C)
F) B) and D)

Question 17

If the volatility of an option increases:

Accepted Answer

A)   the value of a call option will increase,but a put option will decrease.
B)   the value of a call option will decrease,but a put option will increase.
C)   the value of a call option will decrease,and a put option will decrease.
D)   the value of a call option will increase,and a put option will increase.E) A) and B)
F) A) and C)

Question 18

In order to calculate (basic)earnings per share,the earnings after taxes have to be adjusted for the elimination of the convertible bond interest expense.

Accepted Answer

A) True 
 B)False

Question 19

The minimum theoretical value of a warrant to buy 6 shares of a firm's stock at $50 per share is $10.What is the current market price of the firm's stock?

Accepted Answer

A)   $51.67
B)   $50.00
C)   $60.00
D)   $5.00E) A) and B)
F) B) and C)

Question 20

A convertible bond is currently selling for $1,125.It is convertible into 20 shares of common which presently sell for $40 per share.The conversion premium is:

Accepted Answer

A)   $325.
B)   $215.
C)   66.74 shares.
D)   23.80 shares.$40 stock price × 20 shares = $800 conversion valueConversion premium = Bond price of $1,125 - Conversion value of $800 = $325E) A) and D)
F) All of the above

Exam 19: Convertibles, Warrants and Derivatives

The floor price of a convertible bond is determined by:

Correct Answer
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In order to calculate (basic)earnings per share,the earnings after taxes have to be adjusted for the elimination of the convertible bond interest expense.

Correct Answer
verified

Warrants as compared to convertible bonds:

Correct Answer
verified

Correct Answer
verified

FC reported earnings of $12,000,000.During the year FC issued a convertible bond that could be,if fully converted,increase FC's shares outstanding by 575,000.If FC currently has 4,800,000 shares outstanding and the after-tax cost of the convertible bonds is $850,000,what is FC's diluted EPS?

Correct Answer
verified

A $1,000 par value bond with a conversion price of $20 has a conversion ratio of:

Correct Answer
verified

Generally,once a convertible bond trades at a certain premium to its intrinsic value,or at a certain multiple of its conversion price,the bond must be converted into common stock.

Correct Answer
verified

If the volatility of an option increases:

Correct Answer
verified

The conversion premium will be small:

Correct Answer
verified

The minimum theoretical value of a warrant to buy 6 shares of a firm's stock at $50 per share is $10.What is the current market price of the firm's stock?

Correct Answer
verified

A warrant's speculative premium equals the market price of the underlying common stock minus the option price.

Correct Answer
verified

The conversion premium will be large:

Correct Answer
verified

A convertible bond is currently selling for $1,125.It is convertible into 20 shares of common which presently sell for $40 per share.The conversion premium is:

Correct Answer
verified

A common stock equivalent is considered to be any security convertible into common stock.

Correct Answer
verified

Earnings per share (basic)may not include the dilutive effects of all of a firm's convertible bonds.

Correct Answer
verified

Conversion price is usually set _______ the prevailing market price of the common stock at the time the bond issue is sold.

Correct Answer
verified

Which of the following is true?

Correct Answer
verified

The use of a derivative contract can be set up to remove all the risk from a commercial transaction.

Correct Answer
verified

The minimum theoretical value of a warrant to buy 5 shares of ACD stock at $45 per share is $10.What is the current market price of ACD stock?

Correct Answer
verified

If you purchased a convertible bond when first issued,you would pay more for the shares of stock you are entitled to than if you purchased the shares directly on the market at that point in time.

Correct Answer
verified

Exam 19: Convertibles, Warrants and Derivatives

The floor price of a convertible bond is determined by:

Correct AnswerverifiedShow Answer

In order to calculate (basic)earnings per share,the earnings after taxes have to be adjusted for the elimination of the convertible bond interest expense.

Correct AnswerverifiedShow Answer

Warrants as compared to convertible bonds:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

FC reported earnings of $12,000,000.During the year FC issued a convertible bond that could be,if fully converted,increase FC's shares outstanding by 575,000.If FC currently has 4,800,000 shares outstanding and the after-tax cost of the convertible bonds is $850,000,what is FC's diluted EPS?

Correct AnswerverifiedShow Answer

A $1,000 par value bond with a conversion price of $20 has a conversion ratio of:

Correct AnswerverifiedShow Answer

Generally,once a convertible bond trades at a certain premium to its intrinsic value,or at a certain multiple of its conversion price,the bond must be converted into common stock.

Correct AnswerverifiedShow Answer

If the volatility of an option increases:

Correct AnswerverifiedShow Answer

The conversion premium will be small:

Correct AnswerverifiedShow Answer

The minimum theoretical value of a warrant to buy 6 shares of a firm's stock at $50 per share is $10.What is the current market price of the firm's stock?

Correct AnswerverifiedShow Answer

A warrant's speculative premium equals the market price of the underlying common stock minus the option price.

Correct AnswerverifiedShow Answer

The conversion premium will be large:

Correct AnswerverifiedShow Answer

A convertible bond is currently selling for $1,125.It is convertible into 20 shares of common which presently sell for $40 per share.The conversion premium is:

Correct AnswerverifiedShow Answer

A common stock equivalent is considered to be any security convertible into common stock.

Correct AnswerverifiedShow Answer

Earnings per share (basic)may not include the dilutive effects of all of a firm's convertible bonds.

Correct AnswerverifiedShow Answer

Conversion price is usually set _______ the prevailing market price of the common stock at the time the bond issue is sold.

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

The use of a derivative contract can be set up to remove all the risk from a commercial transaction.

Correct AnswerverifiedShow Answer

The minimum theoretical value of a warrant to buy 5 shares of ACD stock at $45 per share is $10.What is the current market price of ACD stock?

Correct AnswerverifiedShow Answer

If you purchased a convertible bond when first issued,you would pay more for the shares of stock you are entitled to than if you purchased the shares directly on the market at that point in time.

Correct AnswerverifiedShow Answer

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