FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 16: Capital Market Financing: Hybrid and Other Securities

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Multiple Choice

Review LaterAdd Note

Review Later

A convertible bond has a call price of $1,100. Its underlying stock is selling at $70 per share, and the conversion price is $50. If owners of the convertible bond convert and sell the stock, what is the profit or loss on each bond if the convertible is called by the company?

A) -$100
B) -$200
C) -$300
D) +$300

E) C) and D)
F) A) and C)

Correct Answer

verified

C

Question 2

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements best describes convertibles?

A) One advantage of convertibles over warrants is that the issuer receives additional cash when convertibles are converted.
B) Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
C) At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price.
D) For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.

E) A) and C)
F) B) and C)

Correct Answer

verified

Show Answer

Question 3

True/False

Review LaterAdd Note

Since warrants and convertibles give holders the right to exchange for their underlying stock, they should represent the same sources of financing.

A convertible debenture can never sell for more than its conversion value or less than its bond value.

The conversion price of a convertible security is fixed and independent of stock market conditions.

What is the theoretical value of a warrant when the current price of the stock is $50 and the exercise price is $45? The exchange ratio is four shares for each warrant.

Which factor will NOT affect the price paid on warrants?

Special purpose vehicles (SPVs) in asset securitization usually contain credit enhancements for their securities.

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Liquid assets such as bankers' acceptance (BA) can never be used for securitization.

The ultimate credit risk of asset-backed securities lies with the special purpose vehicle that is the central payor.

A security made up of corporate loans and credit default swaps is called a collateralized debt obligation (CDO).

Different tranches in a mortgage-backed security have different default risk exposure.

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2007. At any time prior to maturity on February 1, 2027, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, P_c?

The value of the warrant increases as the market price of the underlying shares rises.

Warrants, convertible securities, and call and put options are similar in the sense that they have a value contingent upon the future value of the firm's shares.

A warrant is an option, and as such, it cannot be used as a "sweetener."

Convertible bonds typically have a call provision.

Which statement regarding a collateralized debt obligation (CDO) is true?

Which of the following assets cannot be used for securitization?