Deck 18: Convertible Bonds and Convertible Preferred Stock

Question 1

If a convertible bond is called,the bondholder must convert the bond or lose the appreciation achieved by the stock.

Answer 1

True

Question 2

Convertible preferred stock is usually less risky to investors than the firm's convertible bonds.

Answer 2

False

Question 3

The value of a convertible bond as a debt instrument sets a floor (i.e.,the minimum price)for the bond.

Answer 3

True

Question 4

Convertible bonds are often subordinated to the firm's other debt.

Question 5

A convertible bond's value fluctuates with the price of the stock into which the bond may be converted.

Question 6

If a $1,000 convertible bond may be converted into 25 shares,the exercise price is $40 a share.

Question 7

A convertible bond may be converted at the firm's option into common stock.

Question 8

Convertible preferred stock may be converted into debt.

Question 9

The longer it takes to overcome the capital gains advantage to the stock,the less attractive is a convertible bond.

Question 10

The premium paid over a convertible bond's value as stock tends to fall as the price of the stock rises.

Question 11

Convertible bonds tend to pay more interest than comparable non-convertible bonds.

Question 12

As the price of the stock rises,the probability that a convertible bond will be called increases.

Question 13

Generally,convertible bonds lack a call provision.

Question 14

If interest rates rise,the value of a convertible bond as debt increases.

Question 15

As interest rates increase,the probability that a convertible bond will be called declines.

Question 16

Convertible bonds tend to sell for a premium over their value as stock.

Question 17

The premium paid over a convertible bond's value as debt tends to decline as the price of the stock rises.

Question 18

The potential capital gains from a convertible bond tend to be less than the potential capital gains on the stock into which the bond may be converted.

Question 19

If the value of the stock rises,the value of a convertible bond falls.

Question 20

Convertible preferred stock generally has a call feature designed to force conversion.

Question 21

The value of a convertible bond as stock depends on the
1)current rate of interest
2)number of shares into which it is convertible

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 22

The price of a convertible bond increases when 1.interest rates rise
2)interest rates fall
3)the price of the stock rises
4)the price of the stock falls

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 23

When a convertible bond is called,
1)interest ceases to accrue
2)the bondholder receives the principal
3)the bondholder generally converts the bond
4)dividends are paid to the bondholder

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 24

When interest rates rise,the price of a put bond will tend to fluctuate more than a bond without the put option.

Question 25

If the price of common stock falls,the value of a convertible preferred stock will also tend to fall.

Question 26

A put bond permits

A) the investor to convert the bond into stock
B) the firm to call the bond
C) the investor to sell the bond back to the company
D) the firm to pay a variable rate of interest

Question 27

Convertible preferred stock 12.Convertible preferred stock
1)pays a fixed dividend
2)pays a variable dividend
3)may be converted into the firm's bonds
4)may be converted into the firm's stock

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 28

As the price of common stock rises,

A) the value of convertible bonds and convertible preferred stock declines
B) the value of convertible bonds falls but convertible preferred stock rises
C) the value of convertible bonds rises but convertible preferred stock falls
D) the value of convertible bonds and convertible preferred stock rises

Question 29

Put bonds tend to have lower coupons than bonds that lack the put feature.

Question 30

If interest rates fall,the investor will not exercise the option in a put bond.

Question 31

Convertible bonds sell for a premium over their

A) market price
B) value as stock
C) value as debt
D) value as stock and as debt

Question 32

The dividends paid by a convertible preferred stock are treated as a tax-deductible expense to the firm.

Question 33

The price of a convertible bond is often 1.greater than its value as stock
2)less than its value as stock
3)greater than its value as debt
4)less than its value as debt

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 34

The value of convertible preferred stock depends on the 12.Convertible preferred stock
1)pays a fixed dividend
2)pays a variable dividend
3)may be converted into the firm's bonds
4)may be converted into the firm's stock

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 35

Convertible bonds have a call feature to

A) protect stockholders from early conversions
B) protect bondholders from conversions by stockholders
C) force stockholders to convert
D) force bondholders to convert

Question 36

The value of a convertible bond as debt does not depend on

A) the bond's coupon
B) the conversion price of the bond
C) current interest rates
D) the term of the bond

Question 37

Convertible bonds may dilute current stockholders' equity because

A) the bonds require interest payments
B) the bonds are callable
C) dividends to bondholders reduce earnings
D) new shares are issued when the bonds are converted

Question 38

A put bond permits the investor to sell the bond back to the issuer at par prior to maturity.

Question 39

Buying a bond with an option to sell the bond back to the firm at par is more speculative than buying a bond that lacks this feature.

Question 40

Generally a convertible bond lacks

A)an indenture
B)a call feature
C)a strong sinking fund
D)a maturity date

Question 41

Given the information below,answer the following questions.
A convertible bond has the following features:

Question 42

Corporation HBM has a convertible bond with the following terms:
The bond's credit rating is BBB,and comparable BBB-rated bonds yield 9 percent.
The firm's stock is selling for $45 and pays a dividend of $1.50 a share.The convertible bond is selling for $1,000.
a.What is the premium paid over the bond's value as stock?
b.Given the bond's income advantage, how long must the investor hold the bond to overcome the premium over the bond's value as stock?
c.If the price of the stock increased to $65, is there any reason to expect the firm to call the bond?
d.If the convertible bond is held to maturity, what is the annualized return on an investment in the bond?
e.If the price of the stock declines to $25 a share while interest rates on BBB-rated bonds rise to 12 percent, what impact does the increase in interest rates have on this convertible bond?

Question 43

The interest paid by a convertible bond tends

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 44

If an investor expected the firm to grow slowly,which of the following strategies would be best?

A) sell the stock short
B) buy a convertible bond and short the stock
C) buy the stock
D) buy the firm's convertible securities

Question 45

A convertible bond's payback period 1.increases as the bond's coupon increases
2)decreases as the bond's coupon increases
3)increases as the stock's dividend increases
4)decreases as the stock's dividend increases

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 46

A $50 par value convertible preferred stock is convertible into 5 shares (exercise price of $10).The preferred is selling for $75,and the price of the common stock is $12.If the price of the common stock rises to $20,what is the minimum percentage price increase the holder of the preferred stock should experience?