Question 1

What is the main reason the swap dealers' spreads are kept to a minimum?

Accepted Answer

A)  The competition among the swap dealers is fierce which drives the spreads down 
B)  The swap market is small and not attractive enough for the major financial institutions 
C)  The spreads are heavily controlled by the financial market regulators 
D)  There are very few swap dealers in the market 
A)  The competition among the swap dealers is fierce which drives the spreads down 
B)  The swap market is small and not attractive enough for the major financial institutions 
C)  The spreads are heavily controlled by the financial market regulators 
D)  There are very few swap dealers in the market

Question 2

An option is a security that is neither debt nor equity but derives its value from an underlying assetthat is often another security.

Accepted Answer

A) True 
 B)False

Question 3

Since the purchaser of a convertible security is given an opportunity to become a common stockholder and to share in the firm's future success, convertibles can normally be sold with higher interest rates than nonconvertibles.

Accepted Answer

A) True 
 B)False

Question 4

The intermediary of a swap deal is called a

Accepted Answer

A)  swap dealer 
B)  swap agent 
C)  swap promoter 
D)  swap transactor 
A)  swap dealer 
B)  swap agent 
C)  swap promoter 
D)  swap transactor

Question 5

When the price of the firm's common stock ___________ the conversion price, the market price of theconvertible security will normally  ___________to a level close to its conversion value.

Accepted Answer

A)  equals; fall 
B)  falls below; rise 
C)  rises above; rise 
D)  rises above; fall 
A)  equals; fall 
B)  falls below; rise 
C)  rises above; rise 
D)  rises above; fall

Question 6

In the case of an overhanging issue, if the firm were to call the issue, the bondholders would accept the call price rather than convert the bonds.

Accepted Answer

A) True 
 B)False

Question 7

A firm has an outstanding 15-year convertible bond issue with a $1,000 par value and a statedannual interest rate of seven percent. The bond is convertible into 50 shares of common stock whichhas a current market price of $25. A straight bond could have been sold with a 10 percent stated interest rate. The conversion value of the bond is __________.

Accepted Answer

A)  $1,000 
B)  $ 772 
C)  $1,328 
D)  $1,250 
A)  $1,000 
B)  $ 772 
C)  $1,328 
D)  $1,250

Question 8

In a swap, the counterparties are the companies that participate in the swap.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A)  put option 
B)  repurchase agreement 
C)  conversion feature 
D)  stock-purchase warrant 
A)  put option 
B)  repurchase agreement 
C)  conversion feature 
D)  stock-purchase warrant

Question 10

Two companies would like to borrow money. Company A is offered a fixed rate of 4% and afloating rate of the BA rate (= the current yield on Bankers' Acceptances) + 0.4%. Company B isoffered a fixed rate of 6% and a floating rate of the BA rate + 1.4%. Given this information, which of the following statements is correct?

Accepted Answer

A)  Both companies has a comparative advantage in the floating-rate market 
B)  Company B has a comparative advantage in the floating rate market 
C)  Company A has a comparative advantage in the floating rate market 
D)  Both companies has a comparative advantage in the fixed-rate market 
A)  Both companies has a comparative advantage in the floating-rate market 
B)  Company B has a comparative advantage in the floating rate market 
C)  Company A has a comparative advantage in the floating rate market 
D)  Both companies has a comparative advantage in the fixed-rate market

Question 11

A stock-purchase warrant gives the holder the right to purchase a certain number of shares ofcommon stock at a specified price over a certain period of time.

Accepted Answer

A) True 
 B)False

Question 12

Convertible preferred stock is normally converted into

Accepted Answer

A)  shares of common stock. 
B)  secured bonds. 
C)  warrants. 
D)  debentures. 
A)  shares of common stock. 
B)  secured bonds. 
C)  warrants. 
D)  debentures.

Question 13

For puts and calls, the exercise price is called

Accepted Answer

A)  the option price. 
B)  the market price. 
C)  the striking price. 
D)  the expected value. 
A)  the option price. 
B)  the market price. 
C)  the striking price. 
D)  the expected value.

Question 14

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  remain unchanged. 
B)  decrease. 
C)  increase. 
D)  double. 
A)  remain unchanged. 
B)  decrease. 
C)  increase. 
D)  double.

Question 16

The available options of the firm with an overhanging issue to finance the call include all of the following EXCEPT

Accepted Answer

A)  selling additional preferred stock resulting in higher financial leverage. 
B)  using current retained earnings. 
C)  selling additional debt resulting in a higher debt ratio. 
D)  selling additional common equity resulting in less dilution of eps. 
A)  selling additional preferred stock resulting in higher financial leverage. 
B)  using current retained earnings. 
C)  selling additional debt resulting in a higher debt ratio. 
D)  selling additional common equity resulting in less dilution of eps.

Question 17

At the time of issuance, the issuer of a convertible security normally establishes a conversion price ___________the current market price of the firm's stock.

Accepted Answer

A)  equal to 
B)  above 
C)  unrelated to 
D)  below 
A)  equal to 
B)  above 
C)  unrelated to 
D)  below

Question 18

If a swap dealer "warehouses" deals, it means the dealer

Accepted Answer

A)  transacts with a large number of clients 
B)  transacts with clients involving different notional amounts 
C)  transacts with the counterparties at different times 
D)  transacts in large swap deals 
A)  transacts with a large number of clients 
B)  transacts with clients involving different notional amounts 
C)  transacts with the counterparties at different times 
D)  transacts in large swap deals

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Contrary to convertibles, warrants provide for the injection of additional equity capital into thefirm at some future date.

Accepted Answer

A) True 
 B)False

What is the main reason the swap dealers' spreads are kept to a minimum?

An option is a security that is neither debt nor equity but derives its value from an underlying assetthat is often another security.

Since the purchaser of a convertible security is given an opportunity to become a common stockholder and to share in the firm's future success, convertibles can normally be sold with higher interest rates than nonconvertibles.

The intermediary of a swap deal is called a

When the price of the firm's common stock _ the conversion price, the market price of theconvertible security will normally _to a level close to its conversion value.

In the case of an overhanging issue, if the firm were to call the issue, the bondholders would accept the call price rather than convert the bonds.

In a swap, the counterparties are the companies that participate in the swap.

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 stock-purchase warrant gives the holder the right to purchase a certain number of shares ofcommon stock at a specified price over a certain period of time.

Convertible preferred stock is normally converted into

For puts and calls, the exercise price is called

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

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

The available options of the firm with an overhanging issue to finance the call include all of the following EXCEPT

At the time of issuance, the issuer of a convertible security normally establishes a conversion price ___________the current market price of the firm's stock.

If a swap dealer "warehouses" deals, it means the dealer

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.

Contrary to convertibles, warrants provide for the injection of additional equity capital into thefirm at some future date.

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

Exam 17: Corporate Securities, Derivatives, and Swaps

What is the main reason the swap dealers' spreads are kept to a minimum?

An option is a security that is neither debt nor equity but derives its value from an underlying assetthat is often another security.

Since the purchaser of a convertible security is given an opportunity to become a common stockholder and to share in the firm's future success, convertibles can normally be sold with higher interest rates than nonconvertibles.

The intermediary of a swap deal is called a

When the price of the firm's common stock ___________ the conversion price, the market price of theconvertible security will normally ___________to a level close to its conversion value.

In the case of an overhanging issue, if the firm were to call the issue, the bondholders would accept the call price rather than convert the bonds.

In a swap, the counterparties are the companies that participate in the swap.

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 stock-purchase warrant gives the holder the right to purchase a certain number of shares ofcommon stock at a specified price over a certain period of time.

Convertible preferred stock is normally converted into

For puts and calls, the exercise price is called

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

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

The available options of the firm with an overhanging issue to finance the call include all of the following EXCEPT

At the time of issuance, the issuer of a convertible security normally establishes a conversion price ___________the current market price of the firm's stock.

If a swap dealer "warehouses" deals, it means the dealer

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.

Contrary to convertibles, warrants provide for the injection of additional equity capital into thefirm at some future date.

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

When the price of the firm's common stock _ the conversion price, the market price of theconvertible security will normally _to a level close to its conversion value.