66) Which of the following is true?
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 options are true.
67) What is the difference between the conversion value and conversion premium?
A) The conversion value is the total value received if converted and the conversion premium is
the difference between the value that would be received and how much the bond is selling for.
B) The conversion value is the total value of what the bond is selling for and the conversion
premium is the difference between the value that would be received and how much the bond is
selling for.
C) The conversion value is the total value received if converted and the conversion premium is
the difference between the value that would be received and the par value of the stock.
D) There is no difference since conversion value and conversion premium mean the same thing.
68) Expectations of a significant increase in the price of a firm’s common stock will result in
A) large conversion premiums for the firm’s convertible bonds.
B) small conversion premiums for the firm’s convertible bonds.
C) negative conversion premiums for the firm’s convertible bonds.
D) no effect at all on conversion premiums.
69) 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
A) $325.
B) $800.
C) 66.74 shares.
D) 23.8 shares.
70) A $1,000 par value bond with a conversion price of $50 has a conversion ratio of
A) $40.
B) 40 shares.
C) $20.
D) 20 shares.
71) The theoretical floor value for a convertible bond is its
A) conversion price.
B) conversion value.
C) par value.
D) pure bond value.
72) The floor price of a convertible bond cannot fall below
A) the conversion ratio.
B) the conversion price.
C) the conversion premium.
D) the pure bond value.
73) The price of a convertible bond
A) has downside as well as upside limitations.
B) has only upside limitations.
C) has only downside limitations.
D) has no upside or downside limitations.
74) The conversion premium is the greatest and the downside risk the smallest when
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 stock price is expected to go up drastically.
75) The “floor” or pure bond value of a convertible bond is found by
A) multiplying the price of the firm’s common stock by the conversion ratio.
B) multiplying the bond’s conversion premium by the price of the firm’s common stock.
C) multiplying the price of the firm’s common stock by the conversion ratio and adding the
present value of the bond’s face value.
D) adding the present value of the bond’s interest payments to the present value of the bond’s
face value.
76) The interest rate on convertibles is generally ________ the interest rate on similar
nonconvertible instruments.
A) greater than
B) less than
C) the same as
D) at least twice
77) A convertible bond is often utilized
A) as a sweetener when selling debt.
B) to sell common stock at prices higher than those prevailing when funds are needed.
C) when there is no demand for straight debt.
D) all of these options are true.
78) A disadvantage to the investor of a convertible bond is that
A) the stock price may never rise above the conversion price.
B) if interest rates rise, the pure bond value (floor price) will decline.
C) the interest rate on convertibles is generally one-third below the coupon rate on straight bonds
of similar risk.
D) all of these options are disadvantages.
79) The difference between convertible debt and non-convertible debt is
A) convertible debt is not affected by interest rate changes, while non-convertible debt is.
B) convertible debt is not considered a liability since it can be exchanged for stock, while non-
convertible debt is.
C) convertible debt can be converted into stock at any point in time, while non-convertible debt
can not.
D) convertible debt can come with downside protection, while non-convertible debt does not.
80) Conversion price is usually set ________ the prevailing market price of the common stock at
the time the bond issue is sold.
A) at
B) below
C) above
D) one half
81) Which of the following is not a characteristic of convertible bond issues?
A) The average size of the offering is small.
B) A 15-20% conversion premium at the time of issue is common.
C) Large companies with billions of dollars in sales and assets are the primary issuers.
D) Primary issuers tend to have less than AAA bond credit ratings.
82) If the stock price rises substantially above the conversion price, an advantage to the
corporation would be that
A) the premium would decrease.
B) the floor price would offer the investor downside protection.
C) the bond would most likely be converted into common stock and the debt would not have to
be repaid.
D) None of these options are advantages to the corporation.
83) One advantage to the corporation in selling a convertible bond is
A) the interest rate on a convertible is lower than a straight debt issue of equal risk.
B) the bond may never get converted into common stock and create dilution.
C) if interest rates fall, the bond is likely to be refunded.
D) all of these options are advantages.
84) Which of the following characteristics are drawbacks of convertible bonds?
A) Downside protection has minimal effectiveness if the bond is bought at a large premium over
floor value.
B) Interest rates on the debt-instrument part of a convertible bond are frequently below market
interest rates.
C) Conversion may be forced on the bondholder by call provisions on the convertible bond.
D) All of these options are drawbacks of convertibles.
85) The principle device used by the corporation to force conversion
A) is setting the conversion price above the current market price.
B) is reducing the amount of interest payments.
C) is buying bonds back at below par value.
D) is a call provision.
86) When a company has a convertible bond in its capital structure,
A) it can reduce its debt-to-equity ratio by calling the bond.
B) there is no effect on the firm’s diluted earnings per share.
C) there is no advantage to the firm in forcing conversion of the bonds.
D) all of these options are correct.
87) A step-up in the conversion price refers to
A) the ability of the company to step up the maturity of the bond to an earlier date.
B) the provision that decreases the conversion ratio the longer a convertible bond is held.
C) a refunding of a convertible bond when the conversion value equals the pure bond value.
D) none of these options are true.
88) The computation of “basic earnings per share” will include consideration of
A) retained earnings.
B) shares outstanding.
C) shares outstanding and convertible securities.
D) all of these options are correct.
89) Mirrlees Corp. has $3,000,000 bonds convertible into 50 shares per $1,000 bond. Mirrlees
has 1,000,000 outstanding shares. Mirrlees has a tax rate of 21%. The average Aa bond yield at
the time of issue was 10%. Compute the “basic earnings per share” if after-tax earnings are
$1,400,000.
A) $0.71
B) $1.25
C) $1.33
D) $1.40
90) Mirrlees Corp. has $3,000,000 bonds convertible into 50 shares per $1,000 bond. Mirrlees
has 1,000,000 outstanding shares. Mirrlees has a tax rate of 21%. The average Aa bond yield at
the time of issue was 10%. Compute the “diluted earnings per share” if after-tax earnings are
$1,400,000.
A) $1.42
B) $1.25
C) $1.33
D) $1.17
91) Vickrey Technology has had net income of $1,500,000 in the current fiscal year. There are
1,000,000 shares of common stock outstanding along with convertible bonds, which have a total
face value of $8 million. The $8 million is represented by 5,000 different $1,000 bonds. Each
$1,000 bond owes and pays 4% interest. The conversion ratio is 30. The firm is in a 21% tax
bracket. What is Vickrey’s “diluted earnings per share?”
A) $1.44
B) $1.81
C) $2.00
D) $1.30
92) Jacobs Company has warrants outstanding, which are selling at a $2.50 premium above
intrinsic value. Each warrant allows its owner to purchase one share of common stock at $26. If
the common stock currently sells for $30, what is the warrant price?
A) $6.40
B) $6.75
C) $7.25
D) $6.50
93) Which of the following is true about warrants?
A) At high stock prices, the warrant premium is high.
B) A rising stock price is usually followed by an increase in the price of the warrant.
C) Warrants usually allow the purchase of common and preferred stock.
D) All of these options are true.
94) The Burma Hat Company’s warrant is trading for $10.20. The warrant carries the option to
purchase two shares of common stock for $48. What is the speculative premium if the stock
price is $51.30?
A) $3.30
B) $3.60
C) $6.60
D) $10.20
95) Warrants are
A) long-term options to sell shares of the issuing firm’s stock.
B) fairly stable, low-risk investments.
C) investments whose value is directly related to the price of the underlying stock.
D) structured to sell for precisely their intrinsic value.
96) The intrinsic value of a warrant to buy four shares of Merton stock at $53 per share is $20.
What is the current market price of Merton stock?
A) $55.00
B) $59.00
C) $58.00
D) None of these options are correct
97) Rocky Scholes Swimwear’s warrant is trading for $10.00. The warrant carries the option to
purchase a half share of common stock for $50. What is the speculative premium if the stock
price is $65?
A) $1.00
B) $2.50
C) $5.00
D) $15.00
98) Sen Corporation warrants carry the right to buy 10 shares of Sen common stock at $11.00 per
share. The common stock has a current market price of $11.75 per share. The intrinsic or
minimum value of one Sen warrant is ________.
A) $0
B) $1.50
C) $15
D) $7.50
99) A warrant that does not expire until several years into the future provides its owner the
opportunity to buy a stock. If the stock price rises, the warrant will probably sell for
A) less than its intrinsic value.
B) exactly its intrinsic value.
C) more than its intrinsic value.
D) less than or equal to its intrinsic value.
100) A contract giving the owner the right to buy or sell an asset at a fixed price for a given
period of time is
A) a common stock.
B) an option.
C) a futures contract.
D) a capital investment.
101) A derivative is a financial instrument whose value is determined by
A) a regulatory body such as the SEC.
B) an underlying security.
C) futures and options.
D) None of these options are correct.
102) Options contracts are different than futures contracts because
A) options are not traded on organized exchanges.
B) options do not create an obligation for the owner of the instrument.
C) options are derivatives.
D) options allow exchanges to happen today while futures are only in the future.
103) The owner of a call has
A) the right and the obligation to buy an asset at a given price.
B) the right and the obligation to sell an asset at a given price.
C) the right but not the obligation to buy an asset at a given price.
D) the right but not the obligation to sell an asset at a given price.
104) The owner of a put has
A) the right and the obligation to buy an asset at a given price.
B) the right and the obligation to sell an asset at a given price.
C) the right but not the obligation to buy an asset at a given price.
D) the right but not the obligation to sell an asset at a given price.
105) Which contract is an option?
A) A call
B) A put
C) A futures contract
D) Both a call and a put
106) All of the following are advantages to the corporation of issuing convertibles EXCEPT:
A) Provides a low-cost financing alternative for large, high-quality companies.
B) Is used when the corporation believes its stock is undervalued.
C) Generally is lower cost than straight debt.
D) Provides access for small companies to the debt market.
107) The following benefits occur to the corporation after a forced conversion of a convertible
bond EXCEPT:
A) Lower times interest earned ratio
B) Lower debt-to-asset ratio
C) Higher earnings after taxes
D) All of these options are benefits.
108) Which of the following characteristics are true of a forced conversion?
A) The balance sheet changes
B) The debt becomes equity
C) The debt disappears
D) All of these characteristics are true.
109) All of the following are motivation for firms to issue warrants EXCEPT:
A) Firms may be allowed to issue debt at a lower rate when warrants are included
B) Warrants are used as a sweetener during merger negotiations
C) Warrants are more desirable than convertible securities for creating new common stock
D) All of these options are motivations to issue warrants.