Exam 17: Hybrid and Derivative Securities

Since the conversion feature provides the purchaser of a convertible bond with the possibility of becoming a stockholder, convertible bonds are a less expensive form of financing than similar-risk nonconvertible or straight bonds.

FASB Standard No. 13 requires explicit disclosure of ________ obligation on the firm's balance sheet.

A lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.

A detachable stock purchase warrant means that the bondholders may sell the warrant without selling the security to which it is attached.

Which of the following securities is a popular hybrid security?

A call option is an option to sell a specified number of shares of a stock on or before some future date at a stated price.

Consider the following options data: (a) Determine the amount of profit or loss associated with each option, ignoring brokerage fees. (b) Differentiate a warrant from a right.

Find the solution to the following questions regarding convertible bonds. (a) Calculate the conversion price for each of the following bonds. A $1,000-par-value bond convertible into 25 shares of common stock. A $1,000-par value bond convertible into 100 shares of common stock. (b) Calculate the conversion ratio for each of the following bonds. A $1,000 par-value bond convertible into common stock at $50 per share. A $1,000 par-value bond convertible into common stock at $40 per share. (c) Calculate the stock value for each of the following convertible bonds. A $1,000 par-value bond convertible into common stock at $25 per share. The current market price of the stock is $30 per share. A $1,000 par-value bond convertible into 100 shares of common stock. The current market price of the stock is $12 per share.

When the market price of the common stock exceeds the conversion price, the conversion (or stock) value exceeds the par value of the convertible security.

Leasing is considered a source of financing provided by the lessee to the lessor.

Convertibles can normally be sold with lower interest rates than nonconvertibles.

A hybrid security is neither debt nor equity but instead derives its value from an underlying asset.

The purchaser of a convertible issue sacrifices a portion of his or her interest return ________.

At the time of issuance, the issuer of a convertible security normally establishes a conversion price ________.

A lease arrangement has many more restrictive covenants than those that are normally included as part of a long-term loan.

The option buyer who expects a stock price to decline will purchase ________.

A form of debt or equity that possesses characteristics of both debt and equity financing is called ________.

One motive for issuing convertibles is that convertible securities can be issued with far fewer restrictive covenants than nonconvertibles.

From a firm's point-of-view, which of the following is true of issuance of convertible bonds?

Because a security is first sold with a conversion price above the current market price of a firm's stock, conversion is initially not attractive.