Question 1

A warrant is an option to buy a bond at a specific price over a given period of time.

Accepted Answer

A) True 
 B)False

Question 2

Floor values are sensitive to interest rates.

Accepted Answer

A) True 
 B)False

Question 3

Convertible securities have been used as a medium of exchange for acquiring other companies' stock in mergers and acquisitions.

Accepted Answer

A) True 
 B)False

Question 4

Many warrants are callable.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements describes the relationship between the market value, pure bond value, and associated stock price related to a convertible bond?

Accepted Answer

A) Both increase as the common stock price increases 
B) Market value approaches the pure bond value as the stock price approaches zero 
C) As stock price increases, the pure bond value increases 
D) None of the above 
A) Both increase as the common stock price increases 
B) Market value approaches the pure bond value as the stock price approaches zero 
C) As stock price increases, the pure bond value increases 
D) None of the above

Question 6

Conversion value represents the total value of the underlying shares of common stock into which the security may be converted.

Accepted Answer

A) True 
 B)False

Question 7

What variables are needed to calculate diluted earnings per share?

Accepted Answer

A) Adjusted earnings after taxes, number of shares outstanding, and number of common shares from all potential securities convertible into common stock 
B) Adjusted earnings after taxes and number of shares outstanding 
C) Adjusted earnings after taxes, shares outstanding, common stock equivalents, and all convertibles 
D) Earnings after taxes, common shares outstanding, and all convertible preferred stock 
A) Adjusted earnings after taxes, number of shares outstanding, and number of common shares from all potential securities convertible into common stock 
B) Adjusted earnings after taxes and number of shares outstanding 
C) Adjusted earnings after taxes, shares outstanding, common stock equivalents, and all convertibles 
D) Earnings after taxes, common shares outstanding, and all convertible preferred stock

Question 8

From an institutional investor's standpoint, many convertible securities lack liquidity because:

Accepted Answer

A) of small trading volume. 
B) of the small amount of convertibles that are usually issued by one company. 
C) of the high premiums that usually come in with buying a convertible. 
D) A and B 
A) of small trading volume. 
B) of the small amount of convertibles that are usually issued by one company. 
C) of the high premiums that usually come in with buying a convertible. 
D) A and B

Question 9

From the corporate financial officer's viewpoint, which of the following is not an advantage of issuing convertible bonds?

Accepted Answer

A) The market value of the firm's common stock may rise dramatically 
B) Interest rates are generally lower than on straight debt instruments 
C) Conversion may enhance the firm's stock price 
D) None of the above are advantages 
A) The market value of the firm's common stock may rise dramatically 
B) Interest rates are generally lower than on straight debt instruments 
C) Conversion may enhance the firm's stock price 
D) None of the above are advantages

Question 10

From the corporate financial officer's viewpoint, which of the following is a reason for not calling a bond for redemption when the conversion value is above the par value?

Accepted Answer

A) Calling the bond may encourage everyone to take the stock rather than the par value in cash 
B) The after-tax cost of the dividends on the new shares might be higher than the after-tax cost of the interest expense on the existing convertible bond 
C) The chief financial officer might want to wait until interest rates decline before calling the bond 
D) The number of new shares on the market will cause the diluted earnings per share to decline 
A) Calling the bond may encourage everyone to take the stock rather than the par value in cash 
B) The after-tax cost of the dividends on the new shares might be higher than the after-tax cost of the interest expense on the existing convertible bond 
C) The chief financial officer might want to wait until interest rates decline before calling the bond 
D) The number of new shares on the market will cause the diluted earnings per share to decline

Question 11

Dilution of EPS by warrants is not reflected in computations of earnings.

Accepted Answer

A) True 
 B)False

Question 12

When is the best time to convert a convertible bond to common stock?

Accepted Answer

A) When the call price exceeds the conversion value 
B) After the conversion ratio decreases 
C) When the conversion value is below the pure bond value 
D) None of the above 
A) When the call price exceeds the conversion value 
B) After the conversion ratio decreases 
C) When the conversion value is below the pure bond value 
D) None of the above

Question 13

A drawback to using convertibles is their dilutive effect.

Accepted Answer

A) True 
 B)False

Question 14

How are warrants used by corporations?

Accepted Answer

A) To decrease the volatility of their common stock 
B) To allow for issuance of debt at rates lower than would otherwise be required 
C) To decrease the dilution of earnings per share 
D) More than one of the above 
A) To decrease the volatility of their common stock 
B) To allow for issuance of debt at rates lower than would otherwise be required 
C) To decrease the dilution of earnings per share 
D) More than one of the above

Question 15

Corporations may use warrants for which of the following reasons?

Accepted Answer

A) To issue debt under normal circumstances 
B) To use as an 'add-on' in a merger or acquisition agreement 
C) To lower the cost of the bonds to the corporation 
D) None of the above 
A) To issue debt under normal circumstances 
B) To use as an 'add-on' in a merger or acquisition agreement 
C) To lower the cost of the bonds to the corporation 
D) None of the above

Question 16

Why are warrants less desirable than convertible debentures as financing devices for the creation of new common stock?

Accepted Answer

A) There is no device for forcing investors to exercise warrants 
B) The conversion of convertible securities erases debt on the balance sheet 
C) Warrants increase the equity of a firm when exercised, but there is no change in the debt 
D) All of the above 
A) There is no device for forcing investors to exercise warrants 
B) The conversion of convertible securities erases debt on the balance sheet 
C) Warrants increase the equity of a firm when exercised, but there is no change in the debt 
D) All of the above

Question 17

What factor(s) would cause the pure bond value to go up?

Accepted Answer

A) A decrease in the market interest rate 
B) An increase in stock price 
C) A change in the conversion ratio 
D) More than one of the above 
A) A decrease in the market interest rate 
B) An increase in stock price 
C) A change in the conversion ratio 
D) More than one of the above

Question 18

A firm has warrants outstanding for investors to purchase 50,000 shares at $25 per share. The current stock price is $40. The firm has l million shares outstanding and earnings per share of $1.50. What are earnings per share when all these warrants are exercised?

Accepted Answer

A) $1.43 
B) $1.47 
C) $1.45 
D) None of the above 
A) $1.43 
B) $1.47 
C) $1.45 
D) None of the above

Question 19

The premium of warrants tends to decrease as the stock price rises.

Accepted Answer

A) True 
 B)False

Question 20

What is the conversion ratio of a $1,000 bond convertible at $27 per share? The coupon rate is 10% and the market rate 12%. This company's common stock is currently trading at $23 per share.

Accepted Answer

A) 37.04 shares 
B) 43.478 shares 
C) 83 shares 
D) 35.2 shares 
A) 37.04 shares 
B) 43.478 shares 
C) 83 shares 
D) 35.2 shares

Exam 13: Convertible Securities and Warrants

A warrant is an option to buy a bond at a specific price over a given period of time.

Floor values are sensitive to interest rates.

Convertible securities have been used as a medium of exchange for acquiring other companies' stock in mergers and acquisitions.

Many warrants are callable.

Which of the following statements describes the relationship between the market value, pure bond value, and associated stock price related to a convertible bond?

Conversion value represents the total value of the underlying shares of common stock into which the security may be converted.

What variables are needed to calculate diluted earnings per share?

From an institutional investor's standpoint, many convertible securities lack liquidity because:

From the corporate financial officer's viewpoint, which of the following is not an advantage of issuing convertible bonds?

From the corporate financial officer's viewpoint, which of the following is a reason for not calling a bond for redemption when the conversion value is above the par value?

Dilution of EPS by warrants is not reflected in computations of earnings.

When is the best time to convert a convertible bond to common stock?

A drawback to using convertibles is their dilutive effect.

How are warrants used by corporations?

Corporations may use warrants for which of the following reasons?

Why are warrants less desirable than convertible debentures as financing devices for the creation of new common stock?

What factor(s) would cause the pure bond value to go up?

A firm has warrants outstanding for investors to purchase 50,000 shares at $25 per share. The current stock price is $40. The firm has l million shares outstanding and earnings per share of $1.50. What are earnings per share when all these warrants are exercised?

The premium of warrants tends to decrease as the stock price rises.

What is the conversion ratio of a $1,000 bond convertible at $27 per share? The coupon rate is 10% and the market rate 12%. This company's common stock is currently trading at $23 per share.

The Investment Setting

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Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

A Basic Look at Portfolio Management and Capital Market Theory

Duration and Bond Portfolio Management

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

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