Exam 17: Hybrid and Derivative Securities

A warrant is attached to a $1,000 par, 10 percent, 15-year bond, paying annual interest and having 10 warrants attached for the purchase of the firm's stock. The bonds were initially sold for $1,020. When issued similar risk straight bonds were selling to yield a 12 percent rate of return. Calculate the implied price of the warrant.

Convertibles can be used as a form of deferred common stock financing.

A firm needs $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 $65 per share. To sell this new issue, the stock would have to be underpriced by $2 and sold for $63 per share. The firm currently has 600,000 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 $73 per share, and the bond could be sold at par. The earnings for the firm are expected to be $4,000,000 in the coming year. Assuming the firm chooses the convertible bond, the earnings per share after all bonds are converted will be ________.

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.

The straight bond value is

Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price.

The striking price is the price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.

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

A form of debt or equity financing that possesses characteristics of both is called a(n)

While, unlike convertible securities, warrants cannot be called, their limited life stimulates holders to exercise them when the exercise price is below the market price of the firm's stock.

An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree that the firm's stock price may increase to $45 per share in the next four months. As an alternative, the investor could purchase a 120-day call option at a striking price of $30 for $5,000. What profit would the investor realize if the stock price increased to $42 per share?

When the market price of the common stock exceeds the conversion price, the conversion (or stock) value exceeds the par value of the convertible security.

A firm has outstanding warrants that are exercisable at $53 per share and entitle holders to purchase two shares of common stock. The common stock is currently selling for $55 per share. The theoretical value of the warrant is

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

One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a higher interest rate if a warrant is attached than if it is not.

Convertible securities can usually be sold with interest rates ________ other nonconvertible securities.

Leasing is considered a source of financing provided by the lessee to the lessor.

Disadvantages of leasing from the lessee's perspective include all of the following EXCEPT

Tangshan Mining Company has an outstanding issue of convertible bonds with a $1,000 par value. The bonds have a 10 percent coupon rate, have a 10-year maturity, and are convertible into 100 shares of common stock. The yield to maturity on bonds of similar risk is 10 percent. Based on this information, the straight bond value of the bond is

The call privilege is generally not exercised until the conversion value of the security is ________ the call price.