1.) A convertible bond is currently selling for $945. It is convertible into 15 shares of common which presently sell for $57 per share. What is the conversion premium?
A. $90
B. $45
C. 57 shares
D. 13 shares
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2.) The conversion ratio is the:
A. price at which a convertible security is exchanged into common stock.
B. ratio of conversion value to market value of a convertible security.
C. number of shares of common stock into which the convertible may be converted.
D. ratio of the conversion premium to market value of a convertible security.
3.) The conversion premium will be large:
A. if investors have great expectations for the price of the common stock.
B. if interest rates decline.
C. when the conversion value is much greater than the pure bond value.
D. when the stock price is very stable.
4.) A convertible bond is currently selling for $1335. It is convertible into 20 shares of common which presently sell for $56 per share. What is the conversion premium?
A. $335
B. $215
C. 66.74 shares
D. 23.8 shares
5.) A $1,000 par value bond with a conversion price of $40 has a conversion ratio of:
A. $25.
B. 25 shares.
C. $40.
D. 40 shares.
6.) The theoretical floor value for a convertible bond is its:
A. conversion price.
B. conversion value.
C. par value.
D. pure bond value.
7.) The conversion premium is the greatest and the downside risk the smallest when the:
A. conversion value equals the pure bond value.
B. conversion value is greater than the pure bond value.
C. conversion value is less than the pure bond value.
D. stock price is expected to go up drastically.
8.) The interest rate on convertibles is generally __________ the interest rate on similar nonconvertible instruments.
A. greater than
B. less than
C. the same as
D. at least twice
9.) Conversion price is usually set __________ the prevailing market price of the common stock at the time the bond issue is sold.
A. at
B. below
C. above
D. at one half of
10.)The principle device used by the corporation to force conversion is:
A. setting the conversion price above the current market price.
B. reducing the amount of interest payments.
C. buying bonds back at below par value.
D. a call provision.
11.)Mirrlees Corp. has 10,000 6.25% bonds convertible into 40 shares per $1000 bond. Mirrlees has 600,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at time of issue was 10%. Compute basic earnings per share if after-tax earnings are $750,000.
A. $0.71
B. $1.25
C. $1.33
D. $1.51
12.)Vickrey Technology has had net income of $2,000,000 in the current fiscal year. There are 1,000,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $8 million. The $8 million is represented by 8,000 different $1,000 bonds. Each $1,000 bond pays 3 percent interest. The conversion ratio is 30. The firm is in a 30 percent tax bracket. What isVickrey’s diluted earnings per share?
A. $1.75
B. $1.81
C. $2.00
D. None of the above
13.)Jacobs and Company has warrants outstanding, which are selling at a $3 premium above intrinsic value. Each warrant allows its owner to purchase one share of common stock at $25. If the common stock currently sells for $28, what is the warrant price?
A. $6
B. $10
C. $12
D. $14
14.)Warrants are:
A. long-term options to sell shares of the issuing firm’s stock.
B. fairly stable, low-risk investments.
C. investments whose value is directly related to the price of the underlying stock.
D. structured to sell for precisely their intrinsic value.
15.)Sen Corporation warrants carry the right to buy 10 shares of Sen common stock at $3.50 per share. The common stock has a current market price of $4.25 per share. What is the intrinsic, or minimum, value of one Sen warrant?
a.$.75
b.$7.50
c.$15
d.$0
16.)A warrant that does NOT expire until several years in the future provides its owner the opportunity to buy a stock. If the stock price rises, the warrant will probably sell for:
a. less than its intrinsic value
b. exactly its intrinsic value
c. more than its intrinsic value
d. less than or equal to its intrinsic value
17.)A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is a /an
a. common stock
b. options
c. futures
d. capital investments
18.)The owner of a call has the right:
a. and the obligation to buy an asset at a given place
b. and the obligation to sell an asset at a given price
c. but not the obligation to buy an asset at a given price
d. but not the obligation to sell an asset at a given price
19.)The owner of a put has the right:
a. and the obligation to buy an asset at a given
b. and the obligation to sell an asset at a given price
c. but not the obligation to buy an asset at a given price
d. but not the obligation to sell an asset at a given price
20.)All of the following are advantages to the corporation of issuing convertibles EXCEPT:
a. provides a low-cost financing alternative for large, high-quality companies
b. used when believe stock is undervalued
c. generally lower cost than straight debt
d. provides access for small co’s to debt market
