Question 1

The interest rate on convertibles is generally ____________ the interest rate on similar nonconvertible instruments.

Accepted Answer

A)   greater than
B)   less than
C)   the same as
D)   at least twice

Question 2

A forced conversion will alter the corporate balance sheet.

Accepted Answer

A) True 
 B)False

Question 3

A forward contract

Accepted Answer

A)   fixes today the right to buy/sell an asset at a future date at a price to be determined at that future date.
B)   fixes today the right to buy/sell an asset at a future date at a price set today.
C)   fixes today the right to buy/sell an asset today at a price to be determined at a future date.
D)   fixes today the right to buy/sell an asset at a future date at a price to be determined at that future date, if the price has decreased.

Question 4

The downside protection of a convertible bond's floor value will protect the investor against loss.

Accepted Answer

A) True 
 B)False

Question 5

Warrants are

Accepted Answer

A)   long-term options to sell shares of the issuing firm's shares
B)   fairly stable, low-risk investments.
C)   investments whose value is directly related to the price of the underlying shares.
D)   structured to sell for precisely their intrinsic value.

Question 6

Conversion premiums are found by subtracting the current share price from the bond's semiannual interest payment.

Accepted Answer

A) True 
 B)False

Question 7

Diluted earnings per share must include all convertible securities.

Accepted Answer

A) True 
 B)False

Question 8

Convertibles, rights, and warrants like other derivatives are the obligation of the financial markets.

Accepted Answer

A) True 
 B)False

Question 9

A disadvantage to the investor of a convertible bond is that

Accepted Answer

A)   the share price may never rise above conversion price.
B)   if interest rates rise, the pure bond value (floor price)  will rise.
C)   the interest rate on convertibles is generally half the coupon rate on straight bonds of similar risk.
D)   all of the other answers are correct

Question 10

The convertible Eurobond market allows foreign companies to issue and trade their securities in the Canadian markets.

Accepted Answer

A) True 
 B)False

Question 11

The floor price of a convertible bond cannot fall below

Accepted Answer

A)   the conversion ratio.
B)   the conversion price.
C)   the conversion premium.
D)   the pure bond value.

Question 12

Foreign investors like convertible Eurobonds because they offer the growth prospects of stocks, rather than the safety of bonds.

Accepted Answer

A) True 
 B)False

Question 13

A company will force conversion of a convertible bond when

Accepted Answer

A)   the conversion value is higher than the call price.
B)   the conversion value is higher than the par value (face value) .
C)   when the total interest payment on the bond equals the total dividend payment on the converted shares of common stock.
D)   when the share price is very low.

Question 14

Which of the following is true about warrants?

Accepted Answer

A)   as the market value of a warrant increases, so does the premium
B)   a rising share price is usually followed by a decrease in the price of the warrant
C)   exercise price is greater than market price ant time of issue
D)   none of the other answers are correct

Question 15

The conversion premium is the greatest and the downside the smallest when

Accepted Answer

A)   the conversion value equals the pure bond value.
B)   the conversion value is greater than the pure bond value.
C)   the conversion value is less than the pure bond value.
D)   the share price is expected to go up drastically.

Question 16

The primary issuers of convertible bonds are smaller, less than top grade companies.

Accepted Answer

A) True 
 B)False

Question 17

Derivatives generally have an unlimited life, as do common shares.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is true?

Accepted Answer

A)   as the price of common stock increases, the market price of a convertible bond and the conversion premium increase
B)   as the price of common stock increases, the market price of a convertible bond and the conversion value increase
C)   as the price of common stock increases, the conversion value and the floor price increase
D)   two of the other answers are true

Question 19

If the volatility of an option increases

Accepted Answer

A)   the value of a call option will increase, but a put option will decrease.
B)   the value of a call option will decrease, but a put option will increase.
C)   the value of a call option will decrease, and a put option will decrease.
D)   the value of a call option will increase, and a put option will increase.

Question 20

In order to calculate (basic) earnings per share, the earnings aftertaxes have to be adjusted for the elimination of the convertible bond interest expense.

Accepted Answer

A) True 
 B)False

Exam 19: Convertibles, Warrants and Derivatives

The primary issuers of convertible bonds are smaller, less than top grade companies.

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Foreign investors like convertible Eurobonds because they offer the growth prospects of stocks, rather than the safety of bonds.

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Conversion premiums are found by subtracting the current share price from the bond's semiannual interest payment.

Correct AnswerverifiedShow Answer

The conversion premium is the greatest and the downside the smallest when

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The interest rate on convertibles is generally ____________ the interest rate on similar nonconvertible instruments.

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Derivatives generally have an unlimited life, as do common shares.

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A forward contract

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Diluted earnings per share must include all convertible securities.

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Which of the following is true about warrants?

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Warrants are

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If the volatility of an option increases

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A disadvantage to the investor of a convertible bond is that

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The floor price of a convertible bond cannot fall below

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A company will force conversion of a convertible bond when

Correct AnswerverifiedShow Answer

The downside protection of a convertible bond's floor value will protect the investor against loss.

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

In order to calculate (basic) earnings per share, the earnings aftertaxes have to be adjusted for the elimination of the convertible bond interest expense.

Correct AnswerverifiedShow Answer

A forced conversion will alter the corporate balance sheet.

Correct AnswerverifiedShow Answer

Convertibles, rights, and warrants like other derivatives are the obligation of the financial markets.

Correct AnswerverifiedShow Answer

The convertible Eurobond market allows foreign companies to issue and trade their securities in the Canadian markets.

Correct AnswerverifiedShow Answer

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