Deck 14: Convertible Securities

Question 1

In the United States, the number of convertible bond issues is closest to

A) 50.
B) 500.
C) 5,000.
D) 50,000.

Answer 1

500.

Question 2

Which of the following is the correct calculation of the conversion ratio?

A) par value/market value
B) par value/premium over conversion value
C) par value/conversion price
D) par value/premium payback period

Answer 2

par value/conversion price

Question 3

A person owns $10,000 face value of XYZ bonds. These bonds have a conversion price of $45. The bond owner may exchange them for _____ shares of stock.

A) 22.222
B) 45.000
C) 222.222
D) 450.00

Answer 3

222.222

Question 4

Which of the following is the correct calculation of the conversion value?

A) par value/market value
B) conversion price ´ stock price
C) conversion ratio ´ conversion price
D) conversion ratio ´ stock price

Question 5

Which of the following is the correct calculation of the premium over conversion value?

A) market price minus par value
B) market price minus conversion ratio
C) market price minus conversion value
D) market price minus stock price

Question 6

All of the following are true except

A) convertible bonds should never sell for more than their conversion value.
B) convertible bonds always have a par value.
C) convertible bonds may only be converted to stock one time.
D) convertible bonds must have a conversion ratio.

Question 7

A bond has a par value of $1,000, a market value of $1,100, a conversion price of $50, and an associated stock price of $51. The premium over conversion value is

A) $0.
B) $50.
C) $80.
D) $100.

Question 8

A bond has a par value of $1,000, a market value of $900, a conversion price of $45, and an associated stock price of $40. The premium over conversion value is

A) $0.
B) $5.00.
C) $11.11.
D) $100.00.

Question 9

A bond whose conversion price is substantially above the current market price is a

A) busted convertible.
B) common stock equivalent.
C) market value bond.
D) premium bond.

Question 10

The market price of a 6.5% coupon bond is 108 3/4. Its conversion price is $37.79. The associated stock sells for $36 and has a 0.56% annual dividend yield. The premium payback period is

A) about nine months.
B) about two years.
C) about three years.
D) about ten years.

Question 11

Another name for the premium payback period is

A) time value.
B) break-even time.
C) amortization time.
D) attenuation time.

Question 12

Which of the following is not an option if a convertible bond is called?

A) sell the bond
B) convert the bond
C) redeem the bond for par value
D) renew the bond

Question 13

The interest rate on a _____ bond is usually _____ than the rate on an otherwise comparable _____ bond.

A) convertible, higher, non-convertible
B) convertible, lower, non-convertible
C) non-convertible, higher, callable
D) non-callable, lower, non-convertible

Question 14

A convertible bond that may be traded for shares in another company is a(n) _____ bond.

A) redeemable
B) warrant
C) exchangeable
D) LYON

Question 15

A standard warrant gives its owner the right to

A) sell stock to other investors.
B) buy stock from the company.
C) buy stock from another investor.
D) sell stock to the company.

Question 16

A warrant is in-the-money when

A) the exercise price equals the stock price.
B) the exercise price exceeds the stock price.
C) the exercise price is below the stock price.
D) both a and

Question 17

All of the following are true except

A) Warrants are similar to call options.
B) Warrants pay no dividends.
C) Warrants sometimes originate as a consequence of a bond issue.
D) Warrant interest is tax exempt.

Question 18

With a conversion ratio of 25 a $1000 convertible bond will be converted

A) at the option of the company.
B) at a conversion price of at least $25.
C) if the stock price moves considerably above $40.
D) at any stock price below $40.

Question 19

A convertible bond of a company with a stock price above the bond conversion price will likely sell:

A) at a value more than the stock conversion price.
B) at a premium less than the conversion value.
C) at a premium more than the conversion value.
D) for its face value.

Question 20

A company with a call option on a convertible bond can force conversion if the

A) stock is selling for more than when the convertible bond was issued.
B) the market value of the bond is more than the face value.
C) the market value of the bond is greater than the call price of the bond.
D) both a and

Question 21

A bond investor is not likely to buy a convertible bond unless:

A) the investor is dependent upon current income from his/her bond portfolio.
B) the investor is willing to take all the similar risks of common stockholders of the company.
C) unless the bondholder is willing to take the downside risk similar to common stockholders.
D) none of the above.

Question 22

An investor in a 5% $1000 convertible bond, convertible at $50 to a currently valued stock of $30, paying a 5% cash dividend yield will likely receive _____ in income next year?

A) $50
B) $30
C) $600
D) $50 interest plus $1.50 per share in dividends.

Question 23

A zero-coupon bond, convertible to common stock on a periodic basis or redeemable(callable) for cash by the company on a regular basis, called a LYON, which stands for:

A) liquid yield only note
B) liquid yes option note
C) liquid yield option note
D) lion yes oh no

Question 24

A $100 par value 4% convertible preferred stock, convertible into common stock at $20 and selling at$15 and paying a $.25 dividend, will pay an investor:

A) $1.25 dividend yearly
B) $4 interest, semiannually
C) $4 dividend/quarter
D) $4 dividend/year

Question 25

A warrant to buy a $15 stock at $20 will cost an investor:

A) $5.
B) some positive value.
C) $20 when the stock value reaches $20.
D) nothing until the value of the stock reaches $20.

Question 26

Companies like to issue convertible bonds because

A) of their upside potential
B) of their downside protection
C) of the lower interest rate
D) none of the above

Question 27

A LYON is a type of

A) non-callable bond
B) zero coupon bond
C) tax-exempt bond
D) warrant

Question 28

About half of all convertible bonds are callable.

Question 29

The convertible bondholder can switch between being a shareholder and a bondholder at will.

Question 30

The conversion price equals the par value divided by the conversion ratio.

Question 31

Bonds will normally sell for less than their conversion value.

Question 32

Convertible bonds offer upside potential and downside protection.

Question 33

A busted convertible is unlikely to be converted.

Question 34

The premium payback period is the time required for the enhanced income from the bond to offset the premium over conversion value.

Question 35

Break-even time is less than the premium payback period.

Question 36

Companies do not like to issue convertible bonds if it is likely they will eventually be converted.

Question 37

The interest rate on a convertible bond is usually higher than that of an otherwise identical non-convertible bond.

Question 38

A LYON is a zero coupon bond.

Question 39

Preferred stock is attractive to corporations because of the tax-exempt nature of most dividend income.

Question 40

An ordinary warrant gives its owner the right to sell shares back to the company at a predetermined price.

Question 41

The maximum price of a warrant is normally the stock price.

Question 42

Investors in convertible bonds have a minimum rate of return on their investment and an option to earn more.

Question 43

If the conversion price is $20 and the stock is trading at $19, the convertible bond is selling at a premium.

Question 44

The longer the premium payback period, the shorter the breakeven time.

Question 45

The higher the market conversion price relative to the current stock price, the greater the premium payback period.

Question 46

A convertible bond whose conversion price is well under the current price is a common stock equivalent.

Question 47

All convertible bonds are convertible into the stock of the issuing company.

Question 48

A 5% $100 convertible preferred with a $20 conversion price and a $30 common stock price is an "in the money"option.

Question 49

Convertible preferred is of interest to financial institutions that invest in common stock and have high marginal tax rates.

Question 50

A warrant may be exercised by the issuing corporation.

Question 51

A warrant is a right, but not an obligation to buy common stock.

Question 52

An "in the money"warrant is likely to sell at a premium over the exercise price.

Question 53

A convertible bond is "out-of-the-money"when there is no time left to convert it.