Question 1

Convertibles can normally be sold with lower interest rates than nonconvertibles.

Accepted Answer

Convertibles are generally considered less risky than nonconvertibles, as the option to convert allows investors to benefit from potential future stock price appreciation. This lower perceived risk can result in lower interest rates offered on convertible securities.

Question 2

Contrary to convertibles, warrants provide for the injection of additional equity capital into thefirm at some future date.

Accepted Answer

The answer of Contrary to convertibles, warrants provide for the...

Question 3

The conversion value of a bond is the minimum price at which a convertible bond would be traded.

Accepted Answer

The conversion value of a bond is the value of the underlying asset (usually stock) that the bond can be converted into, multiplied by the conversion ratio. It is not the minimum price at which a convertible bond would be traded.

Question 4

In a currency swap, the notional amount is exchanged.

Accepted Answer

In a currency swap, the notional amount is exchanged between the two parties involved in the swap. This means that they agree to exchange the principal amounts of two different currencies for a specified period of time. However, at the end of the swap, the original notional amounts will be returned to each party.

Question 5

In Canada, all option contracts are issued, guaranteed, and cleared by the Canadian DerivativesClearing Corporation.

Accepted Answer

The Canadian Derivatives Clearing Corporation (CDCC) is the only organization in Canada that clears and guarantees option contracts.

Question 6

The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.

Accepted Answer

The conversion ratio, which determines how many shares of stock a bondholder can receive upon conversion, is calculated by dividing the bond's par value by the conversion price.

Question 7

A conversion feature is an option that is included as part of a common share issue that allows its holder to change the shares into a stated number of preferred shares.

Accepted Answer

A conversion feature typically allows the holder of a security, such as a bond or preferred share, to convert it into a specified number of common shares, not the other way around.

Question 8

If a swap dealer is "warehousing" a deal, the dealer will transact with the counterparties at different times, not simultaneously.

Accepted Answer

When a swap dealer is "warehousing" a deal, they will execute the trade with each counterparty at different times, as opposed to simultaneously. This is usually done in order to manage the risk associated with the trade.

Question 9

Call option is an option to sell a specified number of shares of a stock on or before some future date at a stated price.

Accepted Answer

A call option is an option to buy a specified number of shares of a stock on or before some future date at a stated price.

Question 10

In a swap, the counterparties are the companies that participate in the swap.

Accepted Answer

In a swap, there are typically two counterparties who enter into the agreement. These counterparties can be individuals, companies, or financial institutions.

Question 11

Convertibles can be used as a form of deferred common stock financing.

Accepted Answer

Convertibles are a type of security that can be converted into common stock at a later date, offering the potential for capital appreciation. This makes them a form of deferred common stock financing.

Question 12

A stock-purchase warrant gives the holder the right to purchase a certain number of shares ofcommon stock at a specified price over a certain period of time.

Accepted Answer

This statement is true. A stock-purchase warrant is a derivative security that gives the holder the right, but not the obligation, to buy a certain number of shares of common stock at a set price, known as the strike price, within a specified period of time.

Question 13

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

Accepted Answer

The conversion feature allows a firm to convert debt into equity without increasing the total financing, thereby changing the capital structure.

Question 14

The exercise price or option price of a warrant is normally set below the market price of the firm'sstock at the time of issuance.

Accepted Answer

The exercise price of a warrant is typically set above the current market price of the stock at the time of issuance, providing an incentive for investors if the stock's price increases.

Question 15

Conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible security.

Accepted Answer

The conversion ratio is the ratio at which a convertible security can be exchanged for a specified number of shares of the underlying common stock, not for a nonconvertible security.

Question 16

The stock-purchase warrant permits the firm to raise additional funds at some point in the future by selling common stock and thereby shifting the firm's capital structure to a less highly levered position.

Accepted Answer

A stock-purchase warrant gives the holder the option to purchase common shares at a specific price within a certain period. If the firm needs to raise additional funds, it can sell these common shares, which would shift the capital structure to a less highly levered position.

Question 17

The presence of contingent securities such as warrants and stock options affects the reporting of thefirm's earnings per share.

Accepted Answer

The presence of contingent securities such as warrants and stock options can increase the number of shares outstanding, which affects the calculation of earnings per share. As a result, the reported earnings per share may be diluted.

Question 18

One motive for issuing convertibles is that convertible securities can be issued with far fewer restrictive covenants than nonconvertibles.

Accepted Answer

This is true because investors are willing to accept fewer restrictions in exchange for the option to convert their securities into common stock. Therefore, convertible securities typically have fewer covenants than nonconvertibles.

Question 19

In a currency swap, the counterparties may exchange fixed payments in one currency for fixed payments in another currency, floating payments in one currency for floating payments in another, or fixed payments for floating payments.

Accepted Answer

The answer of In a currency swap, the counterparties may...

Question 20

Derivatives are used by corporations as a useful tool for managing certain aspects of the firm's risk.

Accepted Answer

Derivatives such as futures, options, and swaps can be used by corporations to hedge against changes in interest rates, exchange rates, commodity prices, and other risks. By using derivatives, corporations can reduce their exposure to these risks and manage them more effectively.

Quiz 17: Corporate Securities, Derivatives, and Swaps