Exam 17: Corporate Securities, Derivatives, and Swaps

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 ______________.

When warrants are exercised,

Conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible security.

A convertible security that cannot be forced into conversion using the call feature is

A vanilla swap gets its name from its simplicity of structure.

In a currency swap, the counterparties exchange loans taken in different currencies.

The key motives for using convertible securities in the firm's financing mix include all of thefollowing EXCEPT

The exercise price price of a warrant is normally set___________ the market price of the firm's stock atthe time of issuance.

A firm needs $1.5 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 $16 per share. To sell this new issue, the stock would have to be underpriced by $1 and sold for $15 per share. The firm currently has 600,000 shares of common stock outstanding. The alternative is to issue 30-year, 8 percent, and $1,000 par-value convertible bonds. The conversion price would be set at $20 per share, and the bond could be sold at par. The earnings for the firm are expected to be $700,000 in the coming year. Which plan results in less dilution of the earnings per share?

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

Interest-rate swaps are not useful for hedging purposes.

A warrant is attached to a $1,000 par, 10 percent, 10-year bond, paying annual interest and having20 warrants attached for the purchase of the firm's stock. The bonds were initially sold for $1,200.When issued, similar risk, straight bonds were selling at a 14 percent rate of return. The implied price of the warrant is

In Canada, the trading of derivative securities occurs on the

The conversion value of a bond is the minimum price at which a convertible bond would be traded.

Swap dealers make a small profit from swaps by adding spreads to the fixed rates involved in the deal.

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

A___________ is an option included as part of a bond or preferred stock that permits the holder toconvert the security into a specified number of shares of common stock.

By using convertible bonds, the issuing firm can temporarily raise debt, which is typically lessexpensive than common stock, to finance projects.

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

The premium for a contract of 100 call options is $400. The strike (exercise) price per share is $30 and the current market price of a share is $33. The investor should: