Question 1

All other things being equal, the the exercise price, given the stock price, the is the call option value.

Accepted Answer

A) higher, higher 
B) higher, lower 
C) lower, lower 
D) lower, higher 
A) higher, higher 
B) higher, lower 
C) lower, lower 
D) lower, higher

Question 2

What is an interest rate swap? Describe how they are used.

Accepted Answer

A swap is a type of financial derivative

Question 3

What variables affect the call option valuation?

Accepted Answer

Variables affecting the call option valu

Question 4

A is a fixed income security with a call option on common stock.

Accepted Answer

A) convertible security 
B) warrant 
C) futures contract 
D) derivative security 
A) convertible security 
B) warrant 
C) futures contract 
D) derivative security

Question 5

The price at which convertible securities are exchangeable for common stock is the

Accepted Answer

A) conversion value 
B) par value 
C) put price 
D) conversion price 
A) conversion value 
B) par value 
C) put price 
D) conversion price

Question 6

are examples of contingent claims.

Accepted Answer

A) Convertible bonds and warrants 
B) Warrants and extendible notes 
C) Options and extendible notes 
D) Convertible bonds, options, and warrants 
A) Convertible bonds and warrants 
B) Warrants and extendible notes 
C) Options and extendible notes 
D) Convertible bonds, options, and warrants

Question 7

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following?

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Nether statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Nether statement I nor II is correct

Question 8

Conversion premium is the amount by which the market value of a convertible security is higher than:

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct

Question 9

Graybar recently sold a convertible bond with a $1,000 par value for a flotation cost of 2 percent (each bond produced $980 for the firm).What is the conversion price if the conversion ratio is 22?

Accepted Answer

A) $44.55 
B) $45.45 
C) $50.00 
D) $4.45 
A) $44.55 
B) $45.45 
C) $50.00 
D) $4.45

Question 10

A security whose payoffs (returns) depend on the value of another security is known as a(n) .

Accepted Answer

A) interest rate swap 
B) master limited partnership 
C) contingent claim 
D) extendible note 
A) interest rate swap 
B) master limited partnership 
C) contingent claim 
D) extendible note

Question 11

A is a fixed-income security issued by a company with a call option on its common stock.

Accepted Answer

A) warrant 
B) convertible debenture 
C) lease 
D) extendible note 
A) warrant 
B) convertible debenture 
C) lease 
D) extendible note

Question 12

In calculating fully diluted earnings per share, earnings must be adjusted for:

Accepted Answer

A) interest saved. 
B) the number of convertible securities in the marketplace. 
C) the number of executive bonus packages that could impact the firm's earnings. 
D) the company's credit rating. 
A) interest saved. 
B) the number of convertible securities in the marketplace. 
C) the number of executive bonus packages that could impact the firm's earnings. 
D) the company's credit rating.

Question 13

People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10.Each warrant entitles the holder to purchase one share of PSW common stock.Last week PSW common stock was selling for $12 per share and, at the same time, the warrants traded at $5 each.Determine the formula value of PSW warrants.

Accepted Answer

A) $0 
B) $2 
C) $5 
D) $11 
A) $0 
B) $2 
C) $5 
D) $11

Question 14

In general, the market price of a "right" is than the theoretical value and this difference in values as the right's expiration date approaches.

Accepted Answer

A) less, decreases 
B) less, increases 
C) greater, decreases 
D) greater, increases 
A) less, decreases 
B) less, increases 
C) greater, decreases 
D) greater, increases

Question 15

Craig Supermarkets, Inc.has convertible debentures ($1,000 par value) that are callable at 108 percent of par value.The conversion price of the debenture is $40 per share, and the Craig common stock currently is selling at $55 a share.The company

Accepted Answer

A) could not get the convertible holders to convert if it called the debt 
B) has no intention of calling the convertibles 
C) could force conversion by calling the issue 
D) could realize a gain of $15 a share if it called the convertibles 
A) could not get the convertible holders to convert if it called the debt 
B) has no intention of calling the convertibles 
C) could force conversion by calling the issue 
D) could realize a gain of $15 a share if it called the convertibles

Question 16

Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share.If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants?

Accepted Answer

A) $1 
B) $5 
C) $8 
D) $2 
A) $1 
B) $5 
C) $8 
D) $2

Question 17

Which of the following is/are a feature of convertible securities?

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct

Question 18

The similarities between convertible securities and warrants include all of the following except:

Accepted Answer

A) both tend to reduce agency costs 
B) the purpose of both is the deferred issuance of common stock 
C) both give the company full control over when the common stock is issued 
D) all of these answers are correct 
A) both tend to reduce agency costs 
B) the purpose of both is the deferred issuance of common stock 
C) both give the company full control over when the common stock is issued 
D) all of these answers are correct

Question 19

Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the company's common stock at a price of $25.The convertibles have a coupon interest rate of 8% and mature in 12 years.In addition, the convertible debenture is callable at 110% of the par value.Straight debt of equivalent risk is yielding 12%.The company's common stock is selling at $22 per share.The company has a marginal tax rate of 40%.Determine the conversion value of the issue.

Accepted Answer

A) $1,000 
B) $880 
C) $1,136 
D) $1,120 
A) $1,000 
B) $880 
C) $1,136 
D) $1,120

Question 20

What is the value of a CKS Food's option prior to expiration if the exercise price is $20 and the current stock price is $20?

Accepted Answer

A) greater than $0 
B) $0 
C) less than $0 
D) cannot be valued 
A) greater than $0 
B) $0 
C) less than $0 
D) cannot be valued

Exam 20: Financing with Derivatives

All other things being equal, the the exercise price, given the stock price, the is the call option value.

What is an interest rate swap? Describe how they are used.

What variables affect the call option valuation?

A is a fixed income security with a call option on common stock.

The price at which convertible securities are exchangeable for common stock is the

are examples of contingent claims.

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following?

Conversion premium is the amount by which the market value of a convertible security is higher than:

Graybar recently sold a convertible bond with a $1,000 par value for a flotation cost of 2 percent (each bond produced $980 for the firm).What is the conversion price if the conversion ratio is 22?

A security whose payoffs (returns) depend on the value of another security is known as a(n) .

A is a fixed-income security issued by a company with a call option on its common stock.

In calculating fully diluted earnings per share, earnings must be adjusted for:

In general, the market price of a "right" is than the theoretical value and this difference in values as the right's expiration date approaches.

Craig Supermarkets, Inc.has convertible debentures ($1,000 par value) that are callable at 108 percent of par value.The conversion price of the debenture is $40 per share, and the Craig common stock currently is selling at $55 a share.The company

Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share.If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants?

Which of the following is/are a feature of convertible securities?

The similarities between convertible securities and warrants include all of the following except:

What is the value of a CKS Food's option prior to expiration if the exercise price is $20 and the current stock price is $20?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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