Deck 15: Convertile Securities

Question 1

Convertible preferred stock is usually less risky to investors than the firm's convertible bonds.​

Answer 1

False

Question 2

When a convertible bond is called, the bondholder must convert the bond or lose the appreciation achieved by the stock.​

Answer 2

True

Question 3

A convertible bond's value fluctuates with the price of the stock into which the bond may be converted.​

Answer 3

True

Question 4

Generally, convertible bonds lack a call provision.​

Question 5

As the price of the stock rises, the probability that a convertible bond will be called increases.​

Question 6

Convertible bonds tend to pay less interest than comparable non‑convertible bonds.​

Question 7

Convertible bonds tend to pay more interest than comparable non‑convertible bonds.​

Question 8

A convertible bond may be converted at the firm's option into common stock.​

Question 9

As the price of stock rises, the probability a convertible bond will be called declines.​

Question 10

Convertible preferred stock is convertible into the company's debentures.​

Question 11

​Convertible bonds tend to sell for a premium over their value as stock.

Question 12

If the price of common stock falls, the value of a convertible preferred stock will also tend to fall.​

Question 13

If a $1,000 convertible bond may be converted into 25 shares, the exercise price is $50 a share.​

Question 14

The value of a convertible bond as stock depends in part on the bond's coupon.​

Question 15

The value of a convertible bond as a debt instrument sets a floor (i.e., minimum price) on the bond.​

Question 16

The value of a convertible bond as debt sets the maximum price of the bond.​

Question 17

Convertible preferred stock generally has a call feature designed to force conversion.​

Question 18

As interest rates increase, the firm may call its convertible bonds to avoid paying the higher interest rates.​

Question 19

Convertible bond prices rise when interest rates increase.​

Question 20

As interest rates increase, the probability that a convertible bond will be called declines.​

Question 21

​The value of a convertible bond as debt depends on a maturity date
1) current interest rates
2) the coupon rate of interest
3) the dividends paid by the common stock

A)1 and 2
B)1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 22

​If a bond lacks a conversion feature,
​1) the bond would have a lower coupon
2) the bond would have a higher coupon
3) the price of the bond would be more responsive to changes in interest rates
4) the price of the bond would be less responsive to changes in interest rates

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 23

​Convertible preferred stock
1) pays a fixed dividend
2) may be converted into the firm's common stock
3) is equity

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 24

​Convertible bonds lack

A) ​an indenture
B) ​a call feature
C) ​dividend payments
D) ​a maturity date

Question 25

​The price of a convertible bond is often
1) greater than its value as stock
2) less than its value as stock
3) greater than its value as debt
4) less than its value as debt

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 26

​The value of convertible preferred stock as common stock depends on
1) the exercise terms
2) the dividend paid by the preferred
3) the price of the common stock

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 27

If a convertible bond is not called nor converted, the firm must ultimately retire it.​

Question 28

The value of a convertible bond as stock depends in part upon

A) ​interest rates
B) ​the maturity date
C) ​the exercise price
D) ​the call penalty

Question 29

​Features of convertible bonds include
1) fixed dividends
2) call feature
3) maturity date

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 30

​Which of the following bonds is supported by collateral?​

A) ​convertible bonds
B) ​income bonds
C) ​equipment trust certificates
D) ​debentures

Question 31

The most an investor in a convertible preferred stock can lose is the value of the common stock into which the preferred stock may be converted.​

Question 32

​The value of a convertible bond as debt depends on

A) ​the exercise price
B) ​the call penalty
C) ​the interest rate
D) ​the price of the stock

Question 33

​A convertible bond has the following features: Coupon $6.5 \%$
Maturity date 10 years
Exercise price $\$ 20$
Principal $\$ 1,000$
Call price $\$ 1,065$


Convertible preferred stock
Annual dividend $\$ 2.25$
Convertible into $2.5$ shares of common stock
Call able at $\$ 25$ a share ​
Currently the common stock is selling for $13; the yield on non‑convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?

Question 34

Convertible bonds have​
1) an indenture
2) perpetual life
3) a specified conversion price

A)​​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 35

​As the price of common stock rises,

A) ​the value of convertible bonds and convertible preferred stock declines
B) ​the value of convertible bonds falls but convertible stock rises
C) ​the value of convertible bonds rises but convertible preferred stock falls
D) ​the value of convertible bonds and convertible preferred stock rises

Question 36

​Convertible bonds have a call feature to

A) ​protect stockholders from early conversions
B) ​protect bondholders from conversions by stockholders
C) ​force stockholders to convert
D) ​force bondholders to convert