63) A company issues a callable (at par) five–year, 7% 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 $110 per $100 of face value. What is the yield to call of this bond when it is released?
A) 1.40%%
B) 2.73%
C) 4.71%
D) 5.66%
64) A company issues a callable (at par) five–year, 7% 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 $110 per $100 of face value. What is the yield to maturity of this bond when it is released?
A) 1.40%%
B) 2.80%
C) 4.71%
D) 5.66%
65) A company issues a callable (at par) five–year, 7% 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 $110 per $100 of face value. What is the yield to worst of this bond when it is released?
A) 1.40%%
B) 2.73%
C) 3.00%
D) 4.71%
66) 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%
67) 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%
68) 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%
69) Which of the following statements concerning the use of sinking funds to repurchase a bond issue is NOT
true?
A) The firm makes regular payments into a sinking fund administered by a trustee over the life of the
bond.
B) The firm can reduce the amount of outstanding debt without affecting the cash flows 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.
70) A firm issues $200 million in ten–year bonds with an annual coupon rate of 6%. The firm uses a sinking fund
to repurchase 8% of the bond issue on each coupon payment date. What payment must they make on the
tenth and final coupon payment?
A) $40 million
B) $52 million
C) $56 million
D) $68 million
71) 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 high
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
72) 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 a bond will be greater than the shares of stock that bond can be
converted into.
C) The decision to be made by the bondholder when the bonds are called is the same as she would have to
make at maturity.
D) The issuer can force bondholders to decide whether or not to convert at a time of the issuer’s choosing.
73) A bond has a face value of $100 and a conversion ratio of 28. What is the conversion price?
A) $0.28
B) $2.80
C) $3.57
D) $28.00
74) A bond has a face value of $10,000 and a conversion ratio of 560. The stock is currently trading at $16.30.
What is the conversion price?
A) $6.13
B) $16.30
C) $17.86
D) $56.00
75) A bond has a face value of $10,000 and a conversion ratio of 265. The stock is currently trading at $38.80.
What is the conversion price?
A) $1.56
B) $5.84
C) $25.73
D) $37.74
76) A bond with a face value of $1000 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
B) about $492
C) about $1000
D) above $1666
77) 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 28.45 shares of Supreme Industries common stock per $1000 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 $22.51 per share.”
If on May 17, Supreme Industries is trading as $24.80, what is the value of common stock a holder of a $1,000
note would receive?
A) $787.51
B) $791.21
C) $868.00
D) $871.70
78) 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
79) Coupon: 0%
Conversion Ratio: 207 shares per $1000 principal amount
Call Date: July 1, 2008
Call Price: Par
Maturity: July 1, 2015
A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $4.95. 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 $10,128.00.
C) Convert the bond and accept shares with a value of $10,246.50.
D) Accept the call price and receive $10,000.
80) Coupon: 0%
Conversion Ratio: 158 shares per $1000 principal amount
Call Date: July 1, 2008
Maturity: July 1, 2015
A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $6.58.
What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?
A) par
B) par plus 0.6%
C) par plus 4%
D) par plus 6%
81) Coupon: 0%
Conversion Ratio: 78 shares per $1000 principal amount
Call Date: July 1, 2008
Maturity
:
July 1, 2015
A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $14.40.
What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?
A) par plus 6.66%
B) par plus 7.50%
C) par plus 8.46%
D) par plus 12.32%
82) Coupon: 0%
Conversion Ratio: 285 shares per $10,000 principal amount
Call Date: July 1, 2008
Maturity: July 1, 2015
A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $36.00.
What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?
A) par
B) par plus 2.6%
C) par plus 3.4%
D) par plus 4.1%
83) Coupon: 0%
Call Date: July 1, 2008
Call Price: 104.32%
Maturity: July 1, 2015
A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $28.20.
What is the minimum conversion ratio that would make a bondholder prefer to convert rather than accept
the call price?
A) 32 shares per $1000 principal amount
B) 35 shares per $1000 principal amount
C) 37 shares per $1000 principal amount
D) 41 shares per $1000 principal amount
84) 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
offer 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 specific date (the call date), for the call price.
85) Which of the following statements is FALSE?
A) When bond yields have increased, by exercising the call on the callable bond and then immediately
refinancing, the issuer can lower its borrowing costs.
B) To understand how call provisions affect the price of a bond, we first need to consider when an issuer
will exercise its right to call the bond.
C) If the call provision offers 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.
86) 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.
87) 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 reflects 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.
88) 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.
89) 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.
90) 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.
91) 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 $105 per
$100 of face value. What is the yield to call if this bond is called in one year?
A) 8%
B) 13%
C) 11%
D) 5%
92) A company issues a 20–year, callable bond at par with an 6% 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) 4%
B) 12%
C) 6%
D) 9%
93) 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.
94) 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
95) A convertible bond has a face value of $1000 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 firm’s stock sells for more than $20 per share.
C) When market rates rise above the bond’s coupon rate.
D) A and C.
96) Which of the following is a type of call provision?
A) sinking fund
B) balloon payment
C) conversion feature
D) indenture
97) A callable bond will typically have a ________ yield than an otherwise identical bond without a call feature
because ________.
A) lower, the firm loses flexibility with a callable bond
B) higher, the firm loses flexibility with a callable bond
C) lower, the option to call a bond is valuable.
D) higher, the option to call a bond is valuable.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
98) What are callable bonds?
99) What is yield to call?
100) What is yield to maturity?
101) What is yield to worst?
