Exam 16: Convertible Bonds and Convertible Preferred Stock

A convertible bond may be converted at the firm's option into common stock.

Convertible bonds tend to sell for a premium over their value as stock.

If a convertible bond is called, the bondholder must convert the bond or lose the appreciation achieved by the stock.

Put bonds tend to have lower coupons than bonds that lack the put feature.

If an investor expects the firm to grow slowly, which of the following strategies would be best?

The dividends paid by a convertible preferred stock are treated as a tax-deductible expense to the firm.

When interest rates rise, the price of a put bond will tend to fluctuate more than a bond without the put option.

Convertible bonds sell for a premium over their 1. market price 2. value as stock 3. value as debt

Convertible bonds have a call feature to

Convertible bonds may dilute current stockholders' equity because

If interest rates rise, the value of a convertible bond as debt increases.

The price of a convertible bond is often 1. greater than its value as stock   2. less than its value as stock 3. greater than its value as debt 4. less than its value as debt

Generally, convertible bonds lack a call provision.

Convertible preferred stock generally has a call feature designed to force conversion.

The value of convertible preferred stock depends on 1. the exercise (i.e., conversion)price 2. the number of shares into which the stock may be converted 3. the price of the common stock

Corporation HBM has a convertible bond with the following terms:      Coupon                       5%      Principal                   $1,000      Maturity                    10 years      Conversion price             $50 (20 shares)      Call price               $1,000 + one year's interest ​ The bond's credit rating is BBB, and comparable BBB rated bonds yield 9 percent. ​ The firm's stock is selling for $45 and pays a dividend of $1.50 a share. The convertible bond is selling for $1,000. ​ a. What is the premium paid over the bond's value as stock? ​ b. Given the bond's income advantage, how long must the investor hold the bond to overcome the premium over the bond's value as stock? ​ c. If the price of the bond stock to $65, is there any reason to expect the firm to call the bond? ​ d. If the convertible bond is held to maturity, what is the annualized return on an investment in the bond? ​ e. If the price of the stock declines to $25 a share while interest rates on BBB rated bonds rise to 12 percent, what impact does the increase in interest rates have on this convertible bond?

The premium paid over a convertible bond's value as debt tends to decline as the price of the stock rises.

The potential capital gains from a convertible bond tend to be less than the potential capital gains on the stock into which the bond may be converted.

The price of a convertible bond increases when 1. interest rates rise 2. interest rates fall 3. the price of the stock rises 4. the price of the stock falls

The premium paid over a convertible bond's value as stock tends to fall as the price of the stock rises.