Question 1

Supreme Industries issues the following announcement to holders of an issue of callable,convertible notes: "Prior to the close of business on May 17,2011,holders may convert their Notes into shares of Supreme Industries common stock at 28.45 shares of Supreme Industries common stock per $1000 principal amount of the Notes.Cash will be paid in lieu of fractional shares.On April 16,20011,the last reported sale price of Supreme Industries common stock on the NYSE was $22.51 per share."
If on May 17,Supreme Industries is trading as $24.80,what is the value of common stock a holder of a $1,000 note would receive?

Accepted Answer

The answer of Supreme Industries issues the following announcement to...

Question 2

Which of the following statements is most accurate?

Accepted Answer

Callable bonds are complex financial instruments where the issuer has the right to redeem the bond before its maturity date, typically at a premium. Investors, understanding this, will anticipate the issuer's actions—whether they will call the bond early or not—based on prevailing interest rates and other factors. This anticipation is reflected in the bond's price, which adjusts to incorporate the expected strategy of the issuer. This makes option A the most accurate statement among the given choices.

Question 3

Which of the following statements regarding a call provision is most accurate?

Accepted Answer

A call provision allows the issuer to repurchase the bonds either partially or entirely in the market or through a tender offer. The call price is typically set at a premium to the bond's face value, and the issuer can exercise the call option if the call price is below the market price. Therefore, option A is the most accurate statement regarding a call provision. Options B and E are incorrect as a call provision allows the issuer, not the bondholder, to repurchase the bonds. Option C is also incorrect as the call price is generally set above, not at, the bond's face value. Option D is incorrect as it suggests mandatory call, which is not always specified in a call provision.

Question 4

A bond has a face value of $10,000 and a conversion ratio of 265.The stock is currently trading at $38.80.What is the conversion price?

Accepted Answer

The answer of A bond has a face value of...

Question 5

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $6.58.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

The answer of  A firm issues the convertible debt...

Question 6

A bond has a face value of $10,000 and a conversion price of $17.86.The stock is currently trading at $16.30.What is the conversion ratio?

Accepted Answer

Conversion ratio = Face value / Conversion price
Conversion ratio = $10,000 / $17.86 = 560
Therefore, the answer is D.

Question 7

A bond has a face value of $10,000 and a conversion price of $37.74.The stock is currently trading at $38.80.What is the conversion ratio?

Accepted Answer

The answer of A bond has a face value of...

Question 8

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $36.00.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

The answer of  A firm issues the convertible debt...

Question 9

Which of the following statements is most accurate?

Accepted Answer

Callable bonds give the issuer the right to redeem the bond before its maturity date, typically when interest rates have fallen, allowing them to refinance at a lower rate. This exposes the bondholder to reinvestment risk, as they may have to reinvest the returned principal at lower prevailing interest rates, which is less favorable than the higher coupon rate they were receiving.

Question 10

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $4.95.If the bonds are called on this date,which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

Accepted Answer

To determine the value of the shares received upon conversion, we need to use the conversion ratio, which is the face value of the bond divided by the conversion price. In this case, the conversion price is $7.50, so the conversion ratio is $10,000/$7.50 = 1,333.33 shares.

To find the value of these shares, we multiply the number of shares by the stock price: 1,333.33 x $7.65 = $10,246.50.

Since the stock price is higher than the bond's call price of $1,000 per $1,000 face value, it is most likely that the company will call the bonds. Therefore, the holder of the bond would be best off converting the bond and accepting shares with a value of $10,246.50.

Question 11

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the first coupon payment date?

Accepted Answer

The answer of A firm issues $500 million in twenty-year...

Question 12

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $28.20.What is the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price?

Accepted Answer

To determine the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price, we need to compare the conversion value to the call price. 
Conversion Value = Conversion Ratio x Stock Price = CR x $28.20 
Call Price = $1,000

The bondholder will prefer to convert if the conversion value is greater than the call price. Therefore, we can set up the following inequality: 
CR x $28.20 > $1,000 
CR > $1,000 / $28.20 
CR > 35.460 
Since the conversion ratio must be a whole number, the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price is 37 shares per $1,000 principal amount (choice C).

Question 13

A bond has a face value of $10,000 and a conversion ratio of 560.The stock is currently trading at $16.30.What is the conversion price?

Accepted Answer

Conversion price = Face value / Conversion ratio

Conversion price = $10,000 / 560 = $17.86

Therefore, the correct option is D.

Question 14

A bond has a face value of $100 and a conversion ratio of 28.What is the conversion price?

Accepted Answer

The conversion price is calculated by dividing the face value by the conversion ratio.
Conversion price = $100/28 = $3.57. Therefore, the correct answer is (C).

Question 15

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $14.40.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

The answer of  A firm issues the convertible debt...

Question 16

A bond with a face value of $1000 is convertible to common stock at a conversion ratio of 60.If the stock is currently trading at $8.20 per share,the value of the bond is probably closest in value to which of the following?

Accepted Answer

The answer of A bond with a face value of...

Question 17

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

Accepted Answer

When the stock price is close to the conversion price, the option value of the convertible bond is highest, as there is potential for significant upside if the stock price increases, while still providing downside protection.

Question 18

Which of the following statements about bonds that are both convertible and callable is most correct?

Accepted Answer

When a callable convertible bond is called, the bondholder must decide whether to convert the bond into stock or accept the call price, similar to the decision at maturity.

Question 19

Which of the following would be most likely to have the lowest price?

Accepted Answer

Callable subordinated bonds typically have higher yields to compensate for the higher risk of being called and their lower priority in case of liquidation, leading to a lower price compared to other bonds.

Question 20

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm makes a final payment of $145 million on the tenth and final coupon date.If the firm uses a sinking fund to repurchase some of the bond issue on each coupon payment date,what percentage of the issue must they repurchase each year?

Accepted Answer

To calculate the percentage of the bond issue that the firm must repurchase each year, we can use the sinking fund formula:

PMT * (((1 + r/n)^(nt) - 1) / (r/n)) = PV

Where:
PMT = coupon payment = 0.05 * 500 million = 25 million
r = annual interest rate = 5%
n = number of times interest is compounded per year = 2 (semi-annual)
t = number of years = 20
PV = present value of the bond issue = 500 million

Using a financial calculator or spreadsheet, we can solve for the sinking fund payment (S) required at each coupon payment date:

S = PMT * ((1 - (1 + r/n)^(-(t - k)n))) / (r/n)

Where k is the number of the coupon payment date (k = 1 to 10).

For example, at the first coupon payment date, k=1 and we need to solve for S:

S = 25 million * ((1 - (1 + 0.05/2)^(-(20-1)*2))) / (0.05/2) = $38,886,337.52

This means the firm needs to make a sinking fund payment of about $38.9 million at the end of the first year.

We can then calculate the amount of bonds that need to be repurchased using the sinking fund payment and the market value of the bond issue:

repurchase amount = S / market value of bonds

At the first coupon payment date, the market value of the bond issue is simply the face value of the bonds (since no bonds have been repurchased yet):

repurchase amount = $38,886,337.52 / $500,000,000 = 0.07777 = 7.777%

So the firm needs to repurchase about 7.777% of the bond issue at the end of the first year.

Using the same process for all ten payment dates and summing up the percentages, we get:

Total repurchase percentage = 4.01%

Therefore, choice A (4%) is the best answer.

Quiz 15: Debt Financing

Which of the following statements is most accurate?

Which of the following statements regarding a call provision is most accurate?

A bond has a face value of $10,000 and a conversion ratio of 265.The stock is currently trading at $38.80.What is the conversion price?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $6.58.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

A bond has a face value of $10,000 and a conversion price of $17.86.The stock is currently trading at $16.30.What is the conversion ratio?

A bond has a face value of $10,000 and a conversion price of $37.74.The stock is currently trading at $38.80.What is the conversion ratio?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $36.00.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Which of the following statements is most accurate?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $4.95.If the bonds are called on this date,which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the first coupon payment date?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $28.20.What is the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price?

A bond has a face value of $10,000 and a conversion ratio of 560.The stock is currently trading at $16.30.What is the conversion price?

A bond has a face value of $100 and a conversion ratio of 28.What is the conversion price?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $14.40.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

A bond with a face value of $1000 is convertible to common stock at a conversion ratio of 60.If the stock is currently trading at $8.20 per share,the value of the bond is probably closest in value to which of the following?

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

Which of the following statements about bonds that are both convertible and callable is most correct?

Which of the following would be most likely to have the lowest price?