Question 1

If a swap dealer's spread on a $100 000 000 deal is 3 basis points, the dealer's profit amounts to

Accepted Answer

A)  $300 000 
B)  $3 000 000 
C)  $3 000 
D)  $30 000 
A)  $300 000 
B)  $3 000 000 
C)  $3 000 
D)  $30 000 D

Question 2

A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share ofcommon stock. The bond's conversion ratio is_____________ .

Accepted Answer

A)  25 
B)  20 
C)  40 
D)  50 
A)  25 
B)  20 
C)  40 
D)  50 A

Question 3

A firm needs $2 million of new long-term financing. The firm is considering the sale of common stock or a convertible bond. The current market price of the common stock is $42 per share. To sell this new issue, the stock would have to be underpriced by $2 and sold for $40 per share. The firm currently has 300,000 shares of common stock outstanding. The alternative is to issue 20-year, 10 percent, and $1,000 par-value convertible bonds. The conversion price would be set at $50 per share, and the bond could be sold at par. The earnings for the firm are expected to be $500,000 inthe coming year. Assuming the firm chooses the sale of common stock, the earnings per share in the coming year will be ___________.

Accepted Answer

A)  $1.43 
B)  $1.45 
C)  $1.47 
D)  $1.44 
A)  $1.43 
B)  $1.45 
C)  $1.47 
D)  $1.44 A

Question 4

Preferred shares are considered a hybrid security because they blend the characteristics of both bond and equity.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements correctly describes the fundamental principle of swaps?

Accepted Answer

A)  The parties of the swap each have a comparative advantage in different markets 
B)  One party may have excess cash while the other party has insufficient cash 
C)  The parties face the same rates in the same markets, but they have different objectives regarding their payback period 
D)  One party has an advantage over the other party in all markets and is willing to share that advantage 
A)  The parties of the swap each have a comparative advantage in different markets 
B)  One party may have excess cash while the other party has insufficient cash 
C)  The parties face the same rates in the same markets, but they have different objectives regarding their payback period 
D)  One party has an advantage over the other party in all markets and is willing to share that advantage

Question 6

A ____________ option is an option to purchase a specified number of shares of a stock on or beforesome future date at a specified price, whereas a ___________option is an option to sell a specifiednumber 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.

Accepted Answer

A)  call; put; Puts 
B)  put; call; Calls 
C)  call; put; Calls 
D)  put; call; Puts 
A)  call; put; Puts 
B)  put; call; Calls 
C)  call; put; Calls 
D)  put; call; Puts

Question 7

The "spread" in swap deal refers to

Accepted Answer

A)  the profit made by the swap dealer by adding to the fixed rates of the swap 
B)  the difference between the fixed rates the parties of the swap can borrow at in the fixed-rate market 
C)  the profit made by the counterparties by participating in the swap 
D)  the difference between the floating rates the parties of the swap can borrow at in the floating-rate market 
A)  the profit made by the swap dealer by adding to the fixed rates of the swap 
B)  the difference between the fixed rates the parties of the swap can borrow at in the fixed-rate market 
C)  the profit made by the counterparties by participating in the swap 
D)  the difference between the floating rates the parties of the swap can borrow at in the floating-rate market

Question 8

Diluted earnings per share (eps) are found by adjusting basic eps for the impact of converting all convertibles and exercising all warrants and options that would have dilutive effects on the firm's earnings.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A)  to raise temporarily cheap funds. 
B)  when the call feature is exercised. 
C)  for the potential opportunity to become a common shareholder in the future. 
D)  due to the reduced risk of default. 
A)  to raise temporarily cheap funds. 
B)  when the call feature is exercised. 
C)  for the potential opportunity to become a common shareholder in the future. 
D)  due to the reduced risk of default.

Question 10

If the market price of the underlying share is $27, what is the intrinsic value of a call option that has a premium of $5 and a strike (exercise) price of $25?

Accepted Answer

A)  $5 
B)  $2 
C)  $30 
D)  The option does not have an intrinsic value. 
A)  $5 
B)  $2 
C)  $30 
D)  The option does not have an intrinsic value.

Question 11

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

Accepted Answer

A)  a limited time period and an unlimited time period 
B)  an unlimited time period and a limited time period 
C)  an unlimited time period and an unlimited time period 
D)  a limited time period and a limited time period 
A)  a limited time period and an unlimited time period 
B)  an unlimited time period and a limited time period 
C)  an unlimited time period and an unlimited time period 
D)  a limited time period and a limited time period

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Convertible bonds have all of the following characteristics EXCEPT

Accepted Answer

A)  a less expensive form of financing than straight bonds. 
B)  enhanced marketability. 
C)  conversion increases the firm's debt ratio. 
D)  a call feature. 
A)  a less expensive form of financing than straight bonds. 
B)  enhanced marketability. 
C)  conversion increases the firm's debt ratio. 
D)  a call feature.

Question 14

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

Accepted Answer

A)  protect their interest. 
B)  vote along with common stockholders. 
C)  receive extra income. 
D)  share in the possible future success of the firm. 
A)  protect their interest. 
B)  vote along with common stockholders. 
C)  receive extra income. 
D)  share in the possible future success of the firm.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

If a swap dealer is "warehousing" a deal, the dealer will transact with the counterparties at different times, not simultaneously.

Accepted Answer

A) True 
 B)False

Question 17

Convertible securities can usually be sold with interest rates _____________other nonconvertiblesecurities.

Accepted Answer

A)  higher than 
B)  with no relation to 
C)  lower than 
D)  equal to 
A)  higher than 
B)  with no relation to 
C)  lower than 
D)  equal to

Question 18

An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agreethat the firm's stock price may increase to $45 per share in the next 4 months. As an alternative, theinvestor could purchase a 120-day call option at a striking price of $30 for $5,000. At what stock price would the investor break even?

Accepted Answer

A)  $35 
B)  $45 
C)  $40 
D)  $42 
A)  $35 
B)  $45 
C)  $40 
D)  $42

Question 19

Common share equivalents are all contingent securities that derive a major portion of their valuefrom their conversion privileges or common share characteristics.

Accepted Answer

A) True 
 B)False

Question 20

The similarities of a right and a warrant include all of the following EXCEPT

Accepted Answer

A)  they both give the holder an option to acquire a certain number of shares of common stock at a specified price. 
B)  they both may be traded independently from the security to which they were attached. 
C)  they both result in new equity capital for the firm. 
D)  they are both issued with exercise or subscription prices below the prevailing market price of stock. 
A)  they both give the holder an option to acquire a certain number of shares of common stock at a specified price. 
B)  they both may be traded independently from the security to which they were attached. 
C)  they both result in new equity capital for the firm. 
D)  they are both issued with exercise or subscription prices below the prevailing market price of stock.

If a swap dealer's spread on a $100 000 000 deal is 3 basis points, the dealer's profit amounts to

A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share ofcommon stock. The bond's conversion ratio is_____________ .

Preferred shares are considered a hybrid security because they blend the characteristics of both bond and equity.

Which of the following statements correctly describes the fundamental principle of swaps?

The "spread" in swap deal refers to

Diluted earnings per share (eps) are found by adjusting basic eps for the impact of converting all convertibles and exercising all warrants and options that would have dilutive effects on the firm's earnings.

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

If the market price of the underlying share is $27, what is the intrinsic value of a call option that has a premium of $5 and a strike (exercise) price of $25?

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

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

Convertible bonds have all of the following characteristics EXCEPT

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

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

If a swap dealer is "warehousing" a deal, the dealer will transact with the counterparties at different times, not simultaneously.

Convertible securities can usually be sold with interest rates _____________other nonconvertiblesecurities.

Common share equivalents are all contingent securities that derive a major portion of their valuefrom their conversion privileges or common share characteristics.

The similarities of a right and a warrant include all of the following EXCEPT

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Mergers and Acquisitions, and Business Failure

International Corporate Finance

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Exam 17: Corporate Securities, Derivatives, and Swaps

If a swap dealer's spread on a $100 000 000 deal is 3 basis points, the dealer's profit amounts to

A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share ofcommon stock. The bond's conversion ratio is_____________ .

Preferred shares are considered a hybrid security because they blend the characteristics of both bond and equity.

Which of the following statements correctly describes the fundamental principle of swaps?

The "spread" in swap deal refers to

Diluted earnings per share (eps) are found by adjusting basic eps for the impact of converting all convertibles and exercising all warrants and options that would have dilutive effects on the firm's earnings.

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

If the market price of the underlying share is $27, what is the intrinsic value of a call option that has a premium of $5 and a strike (exercise) price of $25?

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

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

Convertible bonds have all of the following characteristics EXCEPT

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

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

If a swap dealer is "warehousing" a deal, the dealer will transact with the counterparties at different times, not simultaneously.

Convertible securities can usually be sold with interest rates _____________other nonconvertiblesecurities.

Common share equivalents are all contingent securities that derive a major portion of their valuefrom their conversion privileges or common share characteristics.

The similarities of a right and a warrant include all of the following EXCEPT

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters