Question 1

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

Accepted Answer

A)  $15.00 
B)  $16.67 
C)  $17.33 
D)  $20.00

Question 2

Contrary to convertibles, warrants provide for the injection of additional equity capital into a firm immediately.

Accepted Answer

A) True 
 B)False

Question 3

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use.

Accepted Answer

A) True 
 B)False

Question 4

A ________ 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.

Accepted Answer

A)  put option 
B)  stock purchase warrant 
C)  conversion feature 
D)  repurchase agreement

Question 5

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 ________.

Accepted Answer

A)  $20 
B)  $25 
C)  $50 
D)  $100

Question 6

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

Accepted Answer

A)  direct lease 
B)  leveraged lease 
C)  sale-leaseback 
D)  mortgage

Question 7

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

Accepted Answer

A) True 
 B)False

Question 8

For puts and calls, the exercise price is called ________.

Accepted Answer

A)  the expected value 
B)  the market price of the stock 
C)  the strike price 
D)  the option price

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The effect of exercising a warrant on a firm's capital structure ________.

Accepted Answer

A)  reduces leverage less than a converting a convertible security 
B)  increases leverage as much as a converting a convertible security 
C)  reduces leverage more than a converting a convertible security 
D)  is unrelated to a converting a convertible security

Question 11

A ________ gives the holder an option to purchase a certain number of shares of common stock at a specified price over a certain period of time.

Accepted Answer

A)  put option 
B)  convertible bond 
C)  stock purchase warrant 
D)  repurchase agreement

Question 12

Options are the most popular type of ________.

Accepted Answer

A)  derivative security 
B)  hybrid security 
C)  convertible security 
D)  fixed interest bearing security

Question 13

Convertible preferred stock and convertible bonds are normally convertible over ________, respectively.

Accepted Answer

A)  a limited time period and an unlimited time period 
B)  an unlimited time period and a limited time period 
C)  a limited time period and a limited time period 
D)  an unlimited time period and an unlimited time period

Question 14

An option buyer who expects a stock price to decline will purchase a put option.

Accepted Answer

A) True 
 B)False

Question 15

A(n) ________ is neither debt nor equity but derives its value from an underlying asset.

Accepted Answer

A)  derivative security 
B)  hybrid security 
C)  financing lease 
D)  operating lease

Question 16

A ________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. ________ are purchased if the stock price is expected to fall.

Accepted Answer

A)  put; call; Puts 
B)  call; put; Puts 
C)  put; call; Calls 
D)  call; put; Calls

Question 17

Which of the following is true of conversion feature of a bond?

Accepted Answer

A)  It adds a degree of speculation to a bond issue, although the issue still maintains its value as a bond. 
B)  It decreases the marketability and liquidity of a bond since conversion feature is perceived by the market as a pessimistic approach about the firm's future. 
C)  It is analogous to the put option, since it gives the bondholders the option to sell the bonds at any time till maturity. 
D)  It increases the cost of debt financing.

Question 18

As the price of the underlying stock falls below the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will ________.

Accepted Answer

A)  increase 
B)  decrease 
C)  remain unchanged 
D)  double

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

________ is the price at which a bond would sell in the market without the conversion feature.

Accepted Answer

A)  Conversion value 
B)  Straight bond value 
C)  Strike price value 
D)  Market premium

Exam 17: Hybrid and Derivative Securities

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

Contrary to convertibles, warrants provide for the injection of additional equity capital into a firm immediately.

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use.

A ________ 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.

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 ________.

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

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

For puts and calls, the exercise price is called ________.

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

The effect of exercising a warrant on a firm's capital structure ________.

A ________ gives the holder an option to purchase a certain number of shares of common stock at a specified price over a certain period of time.

Options are the most popular type of ________.

Convertible preferred stock and convertible bonds are normally convertible over ________, respectively.

An option buyer who expects a stock price to decline will purchase a put option.

A(n) ________ is neither debt nor equity but derives its value from an underlying asset.

Which of the following is true of conversion feature of a bond?

As the price of the underlying stock falls below the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will ________.

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

________ is the price at which a bond would sell in the market without the conversion feature.