Exam 17: Hybrid and Derivative Securities

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

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

Convertibles can normally be sold with lower interest rates than non-convertibles.

The stock-purchase warrant 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.

The market value of a warrant is generally below the theoretical value of the warrant.

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

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

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

Convertible bonds have all of the following characteristics EXCEPT

Options are a special type of security that provides the holder with the right to purchase or sell specified assets at a stated price on or before a set expiration date.

Zheng Sen's Pen Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10 percent coupon and a 10-year maturity. The interest rate on a straight bond of similar risk is 8 percent. (a) Calculate the straight bond value of the bond. (b) Calculate the conversion value of the bond when the market price of the stock is $30/share. (c) What is the least you would expect the bond to sell for at a market price of common stock of $18/share?

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

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

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.

Renewal options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.

Maintenance clauses are provisions normally included in an operating lease that require the lessor to maintain the assets and to make insurance and tax payments.

The dominant organized options exchange is the

At the end of the term of the lease agreement, the salvage value of an asset, if any, is realized by the lessee.

The market value of a convertible bond will exceed the conversion value or straight bond value, whichever is greater, by an amount called the market premium. This premium exists because

In a ________, the lessor acts as an equity participant supplying part of the necessary capital while a lender supplies the remaining balance.