Exam 17: Hybrid and Derivative Securities

________ leases are noncancellable and are generally used for leasing land, buildings, and large pieces of fixed equipment.

The call price of a security generally exceeds the security's par value by an amount equal to ________.

Which the following is true of stock purchase warrants?

Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.

The exercise price or option price of a warrant is normally set below the market price of the firm's stock at the time of issuance.

A warrant is attached to a $1,000 par, 10 percent, 10-year bond, paying annual interest and having 20 warrants attached for the purchase of a 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 ________.

The call price of a security ________ the security's par value.

A financial lease is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for five or fewer years, for an asset's services.

One advantage of leasing is that in many cases, the return to the lessor is quite low so the firm in need of an asset might be better off borrowing to purchase it.

In a financial lease, the lessor must receive more than the asset's purchase price in order to earn its required return on the investment.

The consequences of missing a financial lease payment are ________ those of missing an interest or principal payment on debt.

A stock purchase warrant permits a 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 at $40 per share of common stock. If the current market value of common stock per share is $45, the conversion value of the bond is ________.

Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall.

The total payments of ________ lease over the lease period are greater than the initial cost of the leased asset to the lessor.

Common stock equivalents are all contingent securities that derive a major portion of their value from their conversion privileges or common stock characteristics.

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

If a lessee leases (under a financial lease) an asset that subsequently becomes obsolete, it can require the lessor to replace it with an equally productive asset in real term over the remaining term of the lease.

Which of the following is true of call and put options?

Call options are sold with the expectation that the market price of the underlying security will fall while put options are sold with the expectation that the market price of the underlying security will rise.