978-0133507676 Chapter 15 Part 4

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30)

Coupon 0%

Call Date: July 1, 2008

Call Price 103.74%

Maturity: July 1, 2015

A irm issues the convertible debt shown above. The price of stock in this company on July

1, 2008 is $27.24. What is the minimum conversion ratio that would make a bondholder

prefer to convert rather than accept the call price?

A) 33 shares per $1,000 principal amount

B) 36 shares per $1,000 principal amount

C) 38 shares per $1,000 principal amount

D) 42 shares per $1,000 principal amount

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

31) Which of the following statements is FALSE regarding a call provision?

A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can

make a tender ofer for the entire issue.

B) A call provision allows the issuer to repurchase the bonds at a predetermined price.

C) The call price is generally set at or below, and expressed as a percentage of, the bond’s

face value.

D) A call feature allows the issuer of the bond the right (but not the obligation) to retire all

outstanding bonds on (or after) a speciic date (the call date), for the call price.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

32) Which of the following statements is FALSE?

A) When bond yields have increased, by exercising the call on the callable bond and then

immediately reinancing, the issuer can lower its borrowing costs.

B) To understand how call provisions afect the price of a bond, we irst need to consider

when an issuer will exercise its right to call the bond.

C) If the call provision ofers a cheaper way to retire the bonds the issuer will forgo the

option of purchasing the bonds in the open market and call the bonds instead.

D) An issuer can always retire one of its bonds early by repurchasing the bond in the open

market.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

33) Which of the following statements is FALSE?

A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when

market rates are lower than the coupon rate she is currently receiving.

B) When yields have risen, the issuer will not choose to exercise the call on the callable

bond.

C) The issuer will exercise the call option only when the prevailing market rate exceeds the

coupon rate of the bond.

D) A callable bond is relatively less attractive to the bondholder than the identical non-

callable bond.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

34) Which of the following statements is FALSE?

A) Before the call date, investors anticipate the optimal strategy that the issuer will follow,

and the bond price relects this strategy.

B) The yield to maturity of a callable bond is calculated as if the bond were called at the

earliest opportunity.

C) A callable bond will trade at a lower price (and therefore a higher yield) than an

otherwise equivalent non-callable bond.

D) The price of a callable bond can be low when yields are high, but does not rise above the

call value when the yield is low.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

35) Which of the following statements is FALSE?

A) The assumption that underlies the yield calculation of a callable bond—that it will not be

called—is not always realistic, so bond traders often quote the yield to call.

B) The yield to call (YTC) is the annual yield of a callable bond assuming that the bond is

called at the earliest opportunity.

C) We can think of the yield to maturity of a callable bond as the interest rate the

bondholder receives if the bond is not called and repaid in full.

D) Because the price of a callable bond is higher than the price of an otherwise identical

non-callable bond, the yield to maturity of a callable bond will be lower than the yield to

maturity for its non-callable counterpart.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

36) Which of the following statements regarding sinking fund provisions is FALSE?

A) With a sinking fund, if a bond is trading at below its face value, because the bonds are

repurchased at par, the decision as to which bonds to repurchase is made by lottery.

B) With a sinking fund, instead of repaying the entire principal balance on the maturity

date, the company makes regular payments into a sinking fund administered by a trustee

over the life of the bond.

C) Sinking fund provisions usually specify a minimum rate at which the issuer must

contribute to the fund.

D) Because the sinking fund allows the issuer to repurchase the bonds at par, the option to

accelerate the payments is another form of call provision.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

37) Which of the following statements is FALSE?

A) A convertible bond can be thought of as a regular bond plus a special type of call option

called a warrant.

B) On the maturity date of the bond, the strike price of the embedded warrant in a

convertible bond is equal to the face value of the bond divided by the conversion ratio—that

is, the conversion price.

C) Calling a convertible bond transfers the remaining time value of the conversion option

from shareholders to bondholders.

D) If the stock price is low so that the embedded warrant is deep out-of-the-money, the

conversion provision is not worth much and the bond’s value is close to the value of a

straight bond—an otherwise identical bond without the conversion provision.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

38) A company issues a 10-year, callable bond at par with 8% annual coupon payments. The

bond can be called at par in one year after issue or any time after that on a coupon

payment date. The call price is $104 per $100 of face value. What is the yield to call if this

bond is called in one year?

A) 7%

B) 12%

C) 10%

D) 4%

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

39) A company issues a 20-year, callable bond at par with a(n) 9% annual coupon

payments. The bond can be called at par in three years or any time after that on a coupon

payment date. The call price is $110 per $100 of face value. What is the yield to call?

A) 7%

B) 15%

C) 9%

D) 12%

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

40) When a callable bond sells at a premium, the likelihood of a call is ________ and the

yield to worst is the yield to ________.

A) high, call

B) low, call

C) low, maturity

D) high, maturity.

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

41) When a callable bond sells at a discount, the bond’s coupon rate is ________ than market

yields and the yield to worst is the yield to ________.

A) higher, call

B) lower, maturity

C) lower, call

D) high, maturity

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

42) A convertible bond has a face value of $1,000 and a conversion ratio of 50. This bond

will sell at a premium when which of the following occurs?

A) when market rates fall below the bond’s coupon rate

B) when the irm’s stock sells for more than $20 per share

C) when market rates rise above the bond’s coupon rate

D) A and B

AACSB Objective: Analytic Skills

Author: WC

Question Status: Revised

43) Which of the following is a type of call provision?

A) sinking fund

B) balloon payment

C) conversion feature

D) indenture

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

44) A callable bond will typically have a ________ yield than an otherwise identical bond

without a call feature because ________.

A) lower, the irm loses lexibility with a callable bond

B) higher, the irm loses lexibility with a callable bond

C) lower, the option to call a bond is valuable

D) higher, the option to call a bond is valuable

AACSB Objective: Analytic Skills

Author: WC

Question Status: Previous Edition

45) What are callable bonds?

AACSB Objective: Analytic Skills

Author: SS

Question Status: Previous Edition

46) What is yield to call?

AACSB Objective: Analytic Skills

Author: SS

Question Status: Previous Edition

47) What is yield to maturity?

AACSB Objective: Analytic Skills

Author: SS

Question Status: Previous Edition

48) What is yield to worst?

AACSB Objective: Analytic Skills

Author: SS

Question Status: Previous Edition