Question 1

You own a bond that has a face value of $1,000 and a conversion ratio of 25. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.

Accepted Answer

The market value of the bond is $1,000 + $40 = $1,040. The conversion value of the bond is 25 x $41.20 = $1,030, which is less than the call price by $10 ($1,040 - $1,030). Therefore, it is not advisable to convert the bond and it is better to receive the call price of $1,040.

Question 2

A cumulative preferred stock pays a quarterly dividend of $1.25. The issuing firm is experiencing some cash shortfalls and has not paid the dividend for the last two quarters. The current situation is expected to be corrected within the month. Next month, the firm wants to pay dividends to both its preferred and common shareholders. How much will it have to pay to the preferred shareholders per share to do this?

Accepted Answer

Since the preferred stock is cumulative, the missed dividends will accumulate and must be paid before any dividends are paid to common shareholders. The issuing firm has missed two quarterly dividends, so the amount owed to preferred shareholders is:
2 quarters x $1.25 per quarter = $2.50 per share
To pay this amount plus the current quarter's dividend of $1.25, the firm must pay a total of $3.75 per share to its preferred shareholders. Therefore, the correct answer is C.

Question 3

A bond has a conversion ratio of 22, a $1,000 par value, and a market price of $1,038. The stock is selling for $46.14. What is the conversion value?

Accepted Answer

To calculate the conversion value, we multiply the conversion ratio by the current stock price:
$46.14 × 22 = $1,015.08

Question 4

The Bronze Star has 8 percent, semi-annual coupon bonds outstanding that have a face value of $1,000 and a conversion ratio of 24. The bonds mature in 14 years. Comparable, non-convertible bonds are yielding 7.8 percent. The firm also has shares of common stock outstanding at a price of $51 a share. The intrinsic value of the bonds is _____ and the conversion value is _____.

Accepted Answer

The answer of The Bronze Star has 8 percent, semi-annual...

Question 5

A bond has a face value of $1,000 and a call price of $1,030. The bond is callable in 3.5 years and pays a 5 percent, semi-annual coupon. What is the current price if the yield to call is 6 percent?

Accepted Answer

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Question 6

A bond is callable in 2 years and currently has a yield to call of 4.8 percent. The bond has a coupon rate of 5 percent and pays interest semi-annually. The call premium is $50 and the face value is $1,000. What is the current price?

Accepted Answer

The answer of A bond is callable in 2 years...

Question 7

A noncumulative preferred stock pays a quarterly dividend of $1.30. The firm did not pay this dividend last quarter. How much will the company have to pay to the preferred shareholders per share this quarter if it wishes to also pay a common stock dividend?

Accepted Answer

Noncumulative preferred stock does not accumulate unpaid dividends. Therefore, the company only needs to pay the current quarter's dividend of $1.30 per share to preferred shareholders.

Question 8

A semi-annual coupon bond has a 6.5 percent coupon rate, a $1,000 face value, a current value of $1,054.54, and 4 years until the first call date. What is the call price if the yield to call is 6.7 percent?

Accepted Answer

To find the call price, we need to use the formula:

Call price = Face value / (1 + YTC)^n

where YTC is the yield to call, n is the number of semi-annual periods until the call date, and Face value is the face value of the bond.

In this case, YTC = 6.7% and n = 8 (4 years to first call date, with semi-annual payments), so:

Call price = $1,000 / (1 + 0.067/2)^8 
Call price = $1,080

Therefore, the best choice is E, $1,080.

Question 9

A bond has 5 years until it can be called, a 7 percent coupon, and a $1,000 face value. The bond has a market value of $1,030.40 and a yield to call of 7.28 percent. What is the call premium?

Accepted Answer

The answer of A bond has 5 years until it...

Question 10

A convertible bond has a 7 percent, semi-annual coupon and a conversion ratio of 20. The bond has a face value of $1,000 and matures in 13.5 years. The current yield to maturity is 7.1 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 7.25 percent and the stock price is $52. What will your holding period return be?

Accepted Answer

First, we need to calculate the price of the bond today:
Coupon payment = $1,000 x 7%/2 = $35
Discount rate = 7.1%/2 = 0.0355 (semi-annual)
Number of periods = 13.5 x 2 = 27
PV of coupon payments = $35 x (1 - 1/(1+0.0355)^27)/0.0355 = $694.86
PV of face value = $1,000/(1+0.0355)^27 = $385.69
Price of bond = $694.86 + $385.69 = $1,080.55

Next, we need to calculate the price of the bond in one year assuming a yield of 7.25% and a stock price of $52:
Coupon payment = $1,000 x 7%/2 = $35
Discount rate = 7.25%/2 = 0.03625 (semi-annual)
Number of periods = 26 (since one semi-annual period has already passed)
PV of coupon payments = $35 x (1 - 1/(1+0.03625)^26)/0.03625 = $690.56
Conversion value = 20 x $52 = $1,040
Price of bond = $690.56 + $1,040/(1+0.03625)^13.5 = $1,404.88

Finally, we can calculate the holding period return as:
($1,404.88 - $1,080.55 + $35)/$1,080.55 x 100% = 4.90%

Question 11

A bond has a par value of $1,000 and a market price of $1,087.20. The conversion price is $40 and the stock price is $41.75. What is the conversion value?

Accepted Answer

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

Question 12

A $1,000 par value bond has a market price of $986 and a conversion ratio of 16. The stock is selling for $60.74. What is the conversion value?

Accepted Answer

The answer of A $1,000 par value bond has a...

Question 13

A convertible bond has a 5 percent, semi-annual coupon and a conversion ratio of 25. The bond has a face value of $1,000 and matures in 12.5 years. The current yield to maturity is 5.8 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 5.6 percent and the stock price is $43.90. What will your holding period return be?

Accepted Answer

The answer of A convertible bond has a 5 percent,...

Question 14

A firm had a major fire which hampered operations for the past year. As a result, the firm discontinued all dividends for one year. Next month, the firm will resume paying dividends. The normal quarterly payments are $1.50 for the cumulative preferred shares and $0.95 for the common shares. How much will the firm need to pay the preferred shareholders per share if the firm also pays a common dividend?

Accepted Answer

The firm must pay the cumulative preferred shareholders for the missed dividends before paying common dividends. Since the preferred dividend is $1.50 per quarter and was missed for four quarters, the firm owes $6.00 in arrears. Adding the current quarter's $1.50, the total is $7.50 per share.

Question 15

Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have a conversion price of $33.33 and a par value of $1,000. The stock price is currently $33.10. In response to this call, the bondholders should _____ because _____.

Accepted Answer

The call price of $1,025 exceeds the conversion value of the bonds. The conversion value is calculated based on the current stock price ($33.10) and the conversion price ($33.33), which does not directly yield a conversion value exceeding the call price. Therefore, bondholders should accept the call because they receive more from the call ($1,025) than the current value of converting the bonds into stock.

Question 16

A convertible bond has a $1,000 par value, a 6 percent, semi-annual coupon, and a time to maturity of 12 years. The bond has a conversion ratio of 20. Comparable, non-convertible bonds have a yield to maturity of 6.8 percent. What is the intrinsic value of this bond?

Accepted Answer

The intrinsic value of a convertible bond is the sum of its value as a straight bond and its value as a conversion option. The value of the bond as a straight bond is the present value of its future cash flows, which can be calculated using the following formula:PV = C * [1 - (1 + r)^-n] / r + F * (1 + r)^-nwhere:PV is the present value of the bondC is the semi-annual coupon paymentr is the semi-annual yield to maturityn is the number of semi-annual periods to maturityF is the face value of the bondIn this case, the semi-annual coupon payment is $30 (6% of $1,000 / 2), the semi-annual yield to maturity is 3.4% (6.8% / 2), the number of semi-annual periods to maturity is 24 (12 years * 2), and the face value of the bond is $1,000. Plugging these values into the formula, we get:PV = $30 * [1 - (1 + 0.034)^-24] / 0.034 + $1,000 * (1 + 0.034)^-24= $30 * 17.888 + $1,000 * 0.553= $935.09The value of the bond as a conversion option is the value of the shares of common stock that can be obtained by converting the bond. In this case, the conversion ratio is 20, which means that each bond can be converted into 20 shares of common stock. The value of the shares of common stock is not given, so we cannot calculate the value of the bond as a conversion option.However, we can say that the intrinsic value of the bond is at least $935.09, which is the value of the bond as a straight bond.

Question 17

A convertible bond has a 5 percent, semi-annual coupon and a conversion ratio of 35. The bond has a face value of $1,000 and matures in 18 years. The current yield to maturity is 4.9 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 5.05 percent and the stock price is $28.10. What will your holding period return be?

Accepted Answer

The answer of A convertible bond has a 5 percent,...

Question 18

A 6 percent, semi-annual coupon bond has a face value of $1,000 and a time to maturity of 4 years. The bonds are convertible into shares of common stock at a conversion price of $40. The stock price currently is $40.70. Similar, non-convertible bonds have a yield to maturity of 5.6 percent. The intrinsic value of this bond is _____ and the conversion value is _____.

Accepted Answer

The intrinsic value of the bond is calculated using the yield to maturity of similar non-convertible bonds, which is 5.6%. The conversion value is calculated by dividing the face value by the conversion price and multiplying by the current stock price.

Question 19

A convertible bond has an 8 percent, semi-annual coupon and a conversion ratio of 15. The bond has a face value of $1,000 and matures in 9.5 years. The current yield to maturity is 8.1 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 7.6 percent and the stock price is $66.30. What will your holding period return be?

Accepted Answer

The answer of A convertible bond has an 8 percent,...

Question 20

A firm has outstanding common stock valued at $67 a share. The firm also has convertible bonds which have a $1,000 par value, a 7.5 percent, semi-annual coupon, and a time to maturity of 11 years. The bonds have a conversion ratio of 15. Comparable, non-convertible bonds have a yield to maturity of 8.2 percent. What is the intrinsic value of this bond?

Accepted Answer

The intrinsic value of the bond is the present value of the future cash flows, plus the present value of the conversion value. The future cash flows are the semi-annual coupon payments and the par value at maturity. The conversion value is the number of shares that the bond can be converted into, multiplied by the current stock price.The semi-annual coupon payment is $1,000 * 7.5% / 2 = $37.50. The par value at maturity is $1,000. The number of shares that the bond can be converted into is $1,000 / $67 = 14.93. The current stock price is $67.The present value of the future cash flows is:PV = $37.50 * (1 - (1 + 8.2% / 2)^(-22)) / (8.2% / 2) + $1,000 * (1 + 8.2% / 2)^(-22) = $949.90The present value of the conversion value is:PV = 14.93 * $67 * (1 - (1 + 8.2% / 2)^(-22)) / (8.2% / 2) = $7.47The intrinsic value of the bond is the sum of the present value of the future cash flows and the present value of the conversion value:IV = $949.90 + $7.47 = $957.37

Quiz 18: Corporate Bonds

You own a bond that has a face value of $1,000 and a conversion ratio of 25. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _ your bond because the conversion value is _.