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Exam 19: Convertibles, Warrants and Derivatives

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Question 41

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On average, convertible bonds have conversion premiums of less than 10% at the time of issue.

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Question 42

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Most corporations include call provisions in agreements relating to the issue of warrants.

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Question 43

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

Match the following with the items below:

A $1,000 par value bond with a conversion price of $50 has a conversion ratio of

When the market price of a common stock rises above the conversion price, the convertible should always be converted immediately before it drops.

Theoretically, stock options are granted to employees so that the employees will make decisions that benefit shareholders.

Which contract is an option?

A convertible bond has both a downside limit (the pure bond value) and an upside limit (the conversion price).

A convertible bond is currently selling for $970. It is convertible into 15 shares of common stock that presently sell for $50 per share. The conversion premium is

Which of the following is not a characteristic of convertible bond issues?

A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is

Lucky Dog Pet Food has a $1,000 convertible bond outstanding with a conversion price of $12.00 per share. The bond pays an interest payment of $40 semiannually and matures in 20 years unless converted into common stock earlier or called by the company. The common stock currently sells for $11.25 per share. If the bond sold at its theoretical bond value, it would be priced competitively to yield 10% with bonds of the same risk class. a) How many shares of stock are received on conversion? b) What is the conversion value? c) What is the pure bond value? d) How much downside protection has the pure bond value provided to investors? (Provide the answer in dollars.)

Expectations of a significant increase in the price of a firm's common stock will result in

Warrants are often attached to debt securities to increase the debt issue's attractiveness to investors.

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

In order to calculate basic earnings per share, the earnings after taxes must be adjusted for the elimination of the convertible bond interest expense.

A convertible bond is currently selling for $1,125. It is convertible into 20 shares of common stock that presently sell for $40 per share. The conversion premium is

The floor price of a convertible bond cannot fall below

Generally, once a convertible bond trades at a certain premium to its intrinsic value, or at a certain multiple of its conversion price, the bond must be converted into common stock.