13) 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?
A) 2.94%
B) 4.11%
C) 5.60%
D) 6.66%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) 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?
A) 2.40%
B) 4.84%
C) 5.60%
D) 6.66%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
21
15) 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?
A) 2.94%
B) 4.84%
C) 5.60%
D) 6.66%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16) Which of the following statements concerning the use of sinking funds to repurchase a
bond issue is NOT true?
A) A irm should make regular payments into a sinking fund administered by a trustee over
the life of the bond.
B) A irm can reduce the amount of outstanding debt without afecting the cash lows of the
remaining bonds.
C) Payments from the sinking fund are used to repurchase bonds.
D) Bonds can be issued with a sinking fund provision or a call provision, but not both.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
22
17) A irm issues $300 million in ten–year bonds with an annual coupon rate of 8%. The irm
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 inal coupon payment?
A) $32 million
B) $38 million
C) $43 million
D) $54 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18) 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?
A) when the price of the stock is higher than the issuing price
B) when the price of the stock is close to the conversion price
C) when the price of the stock is low
D) when the price of the stock much lower than the conversion price
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
19) Which of the following statements about bonds that are both convertible and callable is
NOT true?
A) If these bonds are called by the issuer, the holder can choose to convert them rather
than let them be called.
B) Prior to maturity, the value of such bonds will be greater than the shares of stock that
bond can be converted into.
C) The decision to be made by the bondholders when the bonds are called is the same as
they would have to make at maturity.
D) By calling the bonds, the issuer can force bondholders to decide to convert at a time of
the issuer’s choice.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
23
20) A bond has a face value of $100 and a conversion ratio of 25. What is the conversion
price?
A) $0.25
B) $2.50
C) $4.00
D) $25.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
21) 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?
A) $7.55
B) $16.50
C) $18.87
D) $53.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
22) 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?
A) $3.41
B) $13.64
C) $40.91
D) $68.18
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
24
23) 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?
A) less than $492.00
B) about $492.00
C) about $1,000
D) above $1666.67
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
24) 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?
A) $664.20
B) $701.10
C) $817.95
D) $739.85
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
25) Which of the following would be most likely to have the lowest price?
A) a straight senior bond
B) a convertible senior bond
C) a callable subordinated bond
D) a straight subordinated bond
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
26)
Coupon 0%
Conversion Ratio:
215 shares per $1,000 principal
amount
Call Date: July 1, 2008
25
Call Price: Par
Maturity: July 1, 2015
A irm 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?
A) Convert the bond and accept shares with a value of $10,000.
B) Convert the bond and accept shares with a value of $9599.75.
C) Convert the bond and accept shares with a value of $10,105.00.
D) Accept the call price and receive $10,000.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
27)
Coupon 0%
Conversion Ratio:
180 shares per $1,000 principal
amount
Call Date: July 1, 2008
Maturity: July 1, 2015
A irm 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?
A) par
B) par plus 12%
C) par plus 8%
D) par plus 1.2%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
26
28)
Coupon 0%
Conversion Ratio:
70 shares per $1,000 principal
amount
Call Date: July 1, 2008
Maturity: July 1, 2015
A irm issues the convertible debt shown above. The price of stock in this company on July
1, 2008 is $15.14. What is the minimum call price that would make a bondholder prefer to
accept the call rather than convert?
A) par plus 3.29%
B) par plus 3.89%
C) par plus 4.49%
D) par plus 5.98%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
29)
Coupon 0%
Conversion Ratio:
286 shares per $10,000 principal
amount
Call Date: July 1, 2008
Maturity: July 1, 2015
A irm issues the convertible debt shown above. The price of stock in this company on July
1, 2008 is $37.57. What is the minimum call price that would make a bondholder prefer to
accept the call rather than convert?
A) par
B) par plus 7.5%
C) par plus 9.7%
D) par plus 11.2%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
27