Exam 17: Hybrid and Derivative Securities

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

Contrary to convertibles, warrants provide for the injection of additional equity capital into a firm immediately.

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use.

A ________ permits the firm to raise additional funds at some point in the future by selling common stock and thereby shifting the firm's capital structure to a less highly levered position.

A firm has an outstanding bond with a $1,000 par value that is convertible into 50 shares of common stock. The bond's conversion price per share is ________.

In a ________, the lessor acts as an equity participant supplying part of the necessary capital while a lender supplies the remaining balance.

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

For puts and calls, the exercise price is called ________.

A warrant premium depends largely on investor expectations and on the ability of investors to get more leverage from the warrants than from the underlying stock.

The effect of exercising a warrant on a firm's capital structure ________.

A ________ gives the holder an option to purchase a certain number of shares of common stock at a specified price over a certain period of time.

Options are the most popular type of ________.

Convertible preferred stock and convertible bonds are normally convertible over ________, respectively.

An option buyer who expects a stock price to decline will purchase a put option.

A(n) ________ is neither debt nor equity but derives its value from an underlying asset.

A ________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. ________ are purchased if the stock price is expected to fall.

Which of the following is true of conversion feature of a bond?

As the price of the underlying stock falls below the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will ________.

The conversion feature, which can be part of either a bond or preferred stock, permits a firm to raise additional funds at some point in the future by selling common stock, thereby shifting the company's capital structure to a less highly levered position.

________ is the price at which a bond would sell in the market without the conversion feature.