Question 1

Bubba owns a subordinated debenture in a company that is liquidating. When will he get paid?

Accepted Answer

after the bills are paid and the bank is paid, but before the preferred shareholders. As a creditor, Bubba is paid before any of the shareholders. But his position is subordinated to other creditors, like the bank and accounts payable.

Question 2

When a corporation dissolves, who gets paid first?

Accepted Answer

the tax collector. Taxes always have preference over any other creditors.

Question 3

Bubba wants to buy a $4 convertible preferred with that has a $50 par value and is exchangeable for common stock at $47.50. If the preferred stock is trading at 52, what does Bubba calculate as the common stock price in order to be at parity with the preferred?

Accepted Answer

a little less than 49.38. Bubba needs a calculator to divide the par value of the preferred stock by the price of the common stock. He then divides the result into the price at which the preferred stock is trading.50 divided by 47.50 = 1.05352 divided by 1.053 = 49.38

Question 4

Which of the following is an analyst most likely to classify as a defensive issue?

Accepted Answer

the common stock of a utility company. The term "defensive issue" refers to a security that is least susceptible to swings in the business cycle.

Question 5

Which securities do not receive dividends?

Accepted Answer

warrants. All of the other choices receive dividends if they are declared. But only warrants are a specific security that never pays dividends.

Question 6

Bubba buys a bond issued at par with a 5% coupon that is convertible into common stock at $40. What conversion ratio does Bubba determine?

Accepted Answer

25. The conversion ratio is how many shares of common stock Bubba obtains by converting. Divide the bond price - $1,000 for a single bond - by the $40 conversion price.

Question 7

Bubba buys a bond issued at par with a 5% coupon that is convertible into common stock at $40. The bond increases in value by 20 points. What is the conversion parity of the stock?

Accepted Answer

$48. A 20-point increase results in a bond value of $1,200. Divide that by the conversion ratio of 25 shares to arrive at $48.

Question 8

The most common type of bond issued by a well-established company is:

Accepted Answer

a debenture. Because of the company's well-established financial condition, it issues a debenture that has no specific collateral and is only backed by the creditworthiness of the issuer.

Question 9

A corporate bond is quoted as having a net change in value of plus one point. By how much did the bond price increase?

Accepted Answer

$10. A point is 1% and bonds are priced in $1,000 increments. Multiplying $1,000 by 1% equals $10.

Question 10

A basis point is:

Accepted Answer

0.01%. A basis point is one-hundredth of a point. Since a point is 1%, a basis point is 0.01%. A bond price change of one basis point is ten cents ($1,000 x 0.01%).

Question 11

Bubba buys a $4 convertible preferred with a $50 par value that is exchangeable for common stock at 47.50. If the preferred stock is trading at 52 and the common stock at 51, Bubba determines that the preferred stock is:

Accepted Answer

underpriced and should rise quickly. The parity price for the common stock is about $49.38 - determined as:50 / 47.50 = 1.053
52 / 1.053 = 49.38 Since the common stock is trading at 51, the preferred is underpriced.

Question 12

A case of leverage is:

Accepted Answer

borrowing at 6% and investing the funds at 10%. Leverage is all about using money obtained at a lower cost than what can be earned deploying the funds elsewhere. It is unrelated to arbitrage.

Question 13

Bubba holds 200 shares of common stock in a utility company and receives rights to subscribe to an additional 100 shares at $20. The utility company is raising $40 million of new capital. How many rights does Bubba receive?

Accepted Answer

200. In an issue of rights, there is always one right per share. Bubba owns 200 shares and thus receives the same number of rights.

Question 14

Bubba holds 200 shares of common stock in a utility company and receives rights to subscribe to an additional 100 shares at $20. The utility company is raising $40 million of new capital. How many shares of common stock for the utility company were outstanding prior to the rights offering?

Accepted Answer

4,000,000. Bubba owns 200 shares and receives rights for 100 more. The basis for the rights offering is therefore one new share for each two shares outstanding. The utility company is raising $40 million by selling shares at $20. Therefore, the company is selling 2,000,000 new shares. Since the ratio of existing shares to new shares is 2 to 1, there must be 4,000,000 presently outstanding shares.

Question 15

Bubba owns a perpetual warrant to buy one share of Internet Corporation common stock at $30. Internet Corporation stock is trading at 41.50 and is ex-dividend today at $0.75. What is the market value of Bubba's warrant?

Accepted Answer

cannot be determined. Bubba can put away the calculator. The warrant is "perpetual" so the value is not determinable from today's price of the common stock.

Question 16

The preferred stock of Greatest Technology Corporation has a $100 par and is convertible into four shares of common stock. The preferred is trading at 104.50. The preferred is callable at 101. If the common stock price is presently 27.89, which of the following actions would be a successful arbitrage:

Accepted Answer

purchase the preferred stock and sell an appropriate amount of the common stock "short exempt". Arbitrage is the nearly simultaneous purchase and sale of equal securities in different markets for a profit. Selling four shares of common stock for every one share of preferred stock purchased provides a profit. The transactions involve the same number of common shares because the preferred is convertible to common at a four to one ratio.

Question 17

Commercial paper is typically issued with a maturity date not exceeding:

Accepted Answer

270 days. A characteristic of commercial paper is relatively short duration, normally not exceeding 270 days.

Question 18

Which of the following has the least active secondary market:

Accepted Answer

commercial paper. The sizes of secondary markets for these securities are listed in order with treasuries first, then banker's acceptances, followed by certificates of deposit. There is only a very small secondary market for commercial paper.

Question 19

Which of the following is not a characteristic of treasury bills?

Accepted Answer

they mature one to three years from the date of issuance. Remember the question asks what is "not" a characteristic of treasury bills. The other choices are aspects of treasury bills, which most commonly have maturities of 90 days but never longer than one year.

Question 20

Which of the following price quotes is representative of a treasury bill?

Accepted Answer

5.78 - 5.73. Prices for treasury bills are quoted as percentage yields. A quotation in yield means the first price in the spread - the bid price - should be higher than the offer price. A higher yield means a lower price.

Quiz 2: Investment and Securities