Question 1

A company issues a callable (at par) 20-year, 5% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $102 per $100 of face value. What is the yield to call of this bond when it is released?

Accepted Answer

A) Using a financial calculator, PV = -102, FV = 100, PMT = 5, N = 1;
computing interest = 2.94%; yield to call = 2.94%

Question 2

A bond has a face value of $15,000 and a conversion ratio of 220. The stock is currently trading at $39.20. What is the conversion price?

Accepted Answer

D) $15,000 / 220 = $68.18

Question 3

A company issues a callable (at par) 20-year, 5% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $102 per $100 of face value. What is the yield to worst of this bond when it is released?

Accepted Answer

A) Using a financial calculator, PV = -102, FV = 100, PMT = 5, N = 1;
computing interest = 2.94%
Using a financial calculator, PV = -102, FV = 100, PMT = 5, N = 20;
computing interest = 4.84%
2.94% is worse than 4.84%; hence, 2.94% is the yield to worst.

Question 4

A bond has a face value of $10,000 and a conversion ratio of 530. The stock is currently trading at $16.50. What is the conversion price?

Accepted Answer

C) $10,000 / 530 = $18.87

Question 5

Which of the following statements about bonds that are both convertible and callable is NOT true?

Accepted Answer

Bonds that are both convertible and callable give the bondholder the option to convert the bond into shares of the issuer's stock or to have the bond called by the issuer. If the issuer calls the bond, the bondholder can choose to convert it rather than have the bond called. This is a true statement (A). Prior to maturity, the value of the convertible bond will be equal to the greater of the bond's market value or the value of the stock the bond can be converted into. This statement is false (B). The decision to be made by the bondholder when the bond is called is not the same as the decision at maturity, as the bondholder can choose to convert the bond rather than have it called. This statement is false (C). By calling the bonds, the issuer can force bondholders to decide whether to convert at a time of the issuer's choice. This is a true statement (D).

Question 6

A firm issues $300 million in ten-year bonds with an annual coupon rate of 8%. The firm uses a sinking fund to repurchase 10% of the bond issue on each coupon payment date. What payment must they make on the tenth and final coupon payment?

Accepted Answer

D) Final coupon payment = 0.08 × $300 million = $24 million; 11ea84dc_f518_dc4e_9a63_9d74333add16_TB1316_00_TB1316_00 total payment = $30 million + $24 million = $54 million

Question 7

A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to call of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 1;
computing interest = 2.73%; yield to call = 2.73%

Question 8

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $4.70. 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

C) 2150 × $4.70 = $10,105.00

Question 9

Which of the following statements concerning the use of sinking funds to repurchase a bond issue is NOT true?

Accepted Answer

This statement is not true. Bonds can be issued with both a sinking fund provision and a call provision. A sinking fund provision requires the issuer to make regular payments into a fund that can be used to repurchase a portion of the outstanding bonds, while a call provision allows the issuer to repurchase the bonds at a predetermined price before the maturity date.

Question 10

Supreme Industries issues the following announcement to holders of an issue of callable, convertible notes: "Prior to the close of business on May 17, 2008, holders may convert their Notes into shares of Supreme Industries common stock at 33.25 shares of Supreme Industries common stock per $1,000 principal amount of the Notes. Cash will be paid in lieu of fractional shares. On April 16, 2008, the last reported sale price of Supreme Industries common stock on the NYSE was $21.60 per share."
If on May 17, Supreme Industries is trading as $24.60, what is the value of common stock a holder of a $1,000 note would receive?

Accepted Answer

C) Value per share = $1,000 / 33.25 = $30.075188;
Value of common stock received by a holder on a $1,000 note = 33.25 × $24.60 = $817.95

Question 11

A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to worst of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 1;
computing interest = -2.73%; yield to call = -2.73%
Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 5;
computing interest = 4.71%; yield to maturity = 4.71%
-2.73% is worse than 4.71%; hence, -2.73% is the yield to worst.

Question 12

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $6.00. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

C) 180 × $6.00 = $1080.00; Value over the face value = $1080.00 - 1000 = $80
percentage of face value = $80 / 1000 = 8%

Question 13

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

The value of a convertible bond is highest when the price of the stock is close to the conversion price because it offers both the upside potential of equity (due to the option to convert into stock) and the downside protection of a bond (fixed interest payments). This combination of features is most valuable when the stock price is near the conversion price, as the decision to convert or hold the bond for its fixed returns becomes more nuanced and potentially profitable.

Question 14

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

Accepted Answer

A callable subordinated bond is likely to have the lowest price due to its lower priority in case of liquidation and the risk of being called before maturity, which adds to its risk profile.

Question 15

A bond with a face value of $1,000 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

C) Conversion value is 60 × $8.20 = $492.00, so bond will likely sell closer to par.

Question 16

A bond has a face value of $100 and a conversion ratio of 25. What is the conversion price?

Accepted Answer

C) $100 / 25 = $4.00

Question 17

A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to maturity of this bond when it is released?

Accepted Answer

C) Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 5;
computing interest = 4.71%; yield to maturity = 4.71%

Question 18

A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $104 per $100 of face value. What is the yield to maturity of this bond when it is released?

Accepted Answer

D) Using a financial calculator, PV = -104, FV = 100, PMT = 6, N = 10 ;
computing interest = 5.47%; yield to maturity = 5.47%

Question 19

A company issues a callable (at par) 20-year, 5% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $102 per $100 of face value. What is the yield to maturity of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -102, FV = 100, PMT = 5, N = 20;
computing interest = 4.84%; yield to maturity = 4.84%

Question 20

A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $104 per $100 of face value. What is the yield to worst of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -104, FV = 100, PMT = 6, N = 1;
computing interest = 1.92%; yield to call = 1.92%
Using financial calculator, PV = -104 FV = 100 PMT = 6 N =10
computing interest = 5.47%; yield to maturity = 5.47%
1.92% is worse than 5.47%; hence, 1.92% is the yield to worst.

Quiz 15: Debt Financing