Question 1

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Accepted Answer

A)   $3.76
B)   $3.94
C)   $4.14
D)   $4.35
E)   $4.56Hard:F) A) and E)
G) C) and D)

Question 2

(The following data apply to following Problems . The problems MUST be kept together.) 
The following data apply to Saunders Corporation's convertible bonds:
 
-What is the bond's conversion value?

Accepted Answer

A)   $698.15
B)   $734.89
C)   $773.57
D)   $814.29
E)   $857.14F) A) and B)
G) C) and D)

Question 3

The owner of a convertible bond owns, in effect, both a bond and a call option.

Accepted Answer

A) True 
 B)False

Question 4

Orient Airlines' common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000)  sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2019. What is the conversion value of the bond?

Accepted Answer

A)   $707.33
B)   $744.56
C)   $783.75
D)   $825.00
E)   $866.25F) A) and E)
G) All of the above

Question 5

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

A)   The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.
B)   One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
C)   Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
D)   At the time it is issued, a convertible's conversion (or exercise)  price is generally set equal to or below the underlying stock's price.
E)   For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.F) C) and D)
G) A) and B)

Question 6

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.

Accepted Answer

A) True 
 B)False

Question 7

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Accepted Answer

A) True 
 B)False

Exam 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

(The following data apply to following Problems . The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's conversion value?

Correct Answer
verified

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Correct Answer
verified

The owner of a convertible bond owns, in effect, both a bond and a call option.

Correct Answer
verified

Orient Airlines' common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2019. What is the conversion value of the bond?

Correct Answer
verified

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.

Correct Answer
verified

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Correct Answer
verified

Which of the following statements about convertibles is most CORRECT?

Correct Answer
verified

Exam 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

(The following data apply to following Problems . The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's conversion value?

Correct AnswerverifiedShow Answer

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Correct AnswerverifiedShow Answer

The owner of a convertible bond owns, in effect, both a bond and a call option.

Correct AnswerverifiedShow Answer

Orient Airlines' common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2019. What is the conversion value of the bond?

Correct AnswerverifiedShow Answer

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.

Correct AnswerverifiedShow Answer

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Correct AnswerverifiedShow Answer

Which of the following statements about convertibles is most CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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