Question 1

Convertible bonds typically have a call provision.

Accepted Answer

A) True 
 B)False

Question 2

What is the theoretical value of a warrant when the current price of the stock is $10 and the exercise price is $8? The exchange ratio is three shares for each warrant.

Accepted Answer

A)  $20
B)  $15
C)  $10
D)  $6E) All of the above
F) A) and B)

Question 3

Upstate Water Company just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Accepted Answer

A)  $3.76
B)  $3.94
C)  $4.14
D)  $4.35E) All of the above
F) A) and C)

Question 4

Credit default swaps help protection sellers transfer all interest rate risk to the protection buyers.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is correct regarding the interaction of a firm's share price and the value of issued warrants?

Accepted Answer

A)  The value of the warrant increases as the market price of the underlying shares rises.
B)  The value of the warrant decreases as the market price of the underlying shares eclines.
C)  The value of the warrant increases as the market price of the underlying shares declines.
D)  There is no relationship between the value of a warrant and its stock price.E) None of the above
F) A) and C)

Question 6

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Accepted Answer

A) True 
 B)False

Question 7

The ABC Bank enters into a credit default swap with XYZ Financial.The notional amount of the swap is $50 million.The 5-year swap is based upon a 5-year loan to LMN Corp.The size of the protection payment is 3% per year.As LMN bankrupts during the time this swap is still valid,XYZ has paid ABC $22.5 million for settlements.What is the recovery ratio on the underlying loan?

Accepted Answer

A)  60%
B)  55%
C)  45%
D)  40%E) A) and B)
F) B) and C) B

Question 8

Warren Corporation's stock sells for $42 per share.The company wants to sell some 20-year,annual interest $1,000 par value bonds.Each bond would have 75 warrants attached to it,each exercisable into one share of stock at an exercise price of $47.The firm's straight bonds yield 10%.Each warrant is expected to have a market value of $2.00 given that the stock sells for $42.What coupon interest rate must the company set on the bonds in order to sell the bonds with warrants at par?

Accepted Answer

A)  7.83%
B)  8.24%
C)  8.65%
D)  9.08%E) B) and C)
F) A) and B)

Question 9

Convertible bonds usually have higher credit ratings than the basic nonconvertible bonds.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following best describes the sale of warrants and their effects on stockholder's earnings?

Accepted Answer

A)  The sale of warrants do not dilute stockholder's earnings.
B)  The sale of warrants dilute stockholder's earnings to the extent that dividends are paid out.
C)  The sale of warrants do not dilute stockholder's earnings to the extent that dividends are paid out.
D)  The sale of warrants dilute stockholder's earnings.E) None of the above
F) C) and D)

Question 11

If a zero correlation of default exists between the different securities and the loan,the equity tranche may have no hope of being paid.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements best describes warrants?

Accepted Answer

A)  One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.
B)  The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.
C)  The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.
D)  Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.E) B) and D)
F) A) and D) B

Question 13

Which factor will NOT affect the price paid on warrants?

Accepted Answer

A)  the coupon rates of the security to which the warrant is issued
B)  the expiration time of the warrant
C)  the difference between the current share price and the exercise price on warrants
D)  the amount of cash dividends paid on the common shares of the firmE) B) and D)
F) A) and B) A

Question 14

The ultimate credit risk of asset-backed securities lies with the special purpose vehicle that is the central payor.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is true regarding mortgage-backed security tranches?

Accepted Answer

A)  Different tranches in a mortgage-backed security have different default risk exposure.
B)  All tranches in a mortgage-backed security have the same default risk exposure.
C)  all tranches in a mortgage-backed security have the same returns to investment.
D)  Different tranches in a mortgage-backed security have different default risk exposure .E) A) and C)
F) All of the above

Question 16

Which of the following is generally true of convertible issues?

Accepted Answer

A)  Firms generally call their convertibles when the conversion value is greater than the call price.
B)  Firms generally call their convertibles when the conversion value is less than the call price.
C)  Firms generally do not call their convertibles unless the conversion value is equal to the call price.
D)  Firms generally do not call their convertibles unless the conversion value is greater than the call price.E) B) and C)
F) A) and B)

Question 17

Curry Corporation is setting the terms on a new issue of bonds with warrants.The bonds will have a 30-year maturity and annual interest payments.Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant.The investment bankers estimate that each warrant will have a value of $10.00.A similar straight-debt issue would require a 10% coupon.What coupon rate should be set on the bonds with warrants so that the package would sell for $1,000?

Accepted Answer

A)  6.75%
B)  7.11%
C)  7.48%
D)  7.88%E) A) and B)
F) A) and C)

Question 18

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 19

The conversion price of a convertible security is fixed and independent of stock market conditions.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is correct regarding securitization?

Accepted Answer

A)  Securitization can always improve liquidity with respect to fixed assets.
B)  Securitization does not always improve the liquidity with respect to the securitized assets.
C)  Securitization can always improve liquidity with respect to the securitized assets.
D)  Securitization never improves liquidity with respect to the securitized assets.E) B) and C)
F) A) and B)

Exam 16: Capital Market Financing: Hybrid and Other Securities

Convertible bonds typically have a call provision.

Correct Answer
verified

What is the theoretical value of a warrant when the current price of the stock is $10 and the exercise price is $8? The exchange ratio is three shares for each warrant.

Correct Answer
verified

Upstate Water Company just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Correct Answer
verified

Credit default swaps help protection sellers transfer all interest rate risk to the protection buyers.

Correct Answer
verified

Which of the following is correct regarding the interaction of a firm's share price and the value of issued warrants?

Correct Answer
verified

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Correct Answer
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Correct Answer
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B

Correct Answer
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Convertible bonds usually have higher credit ratings than the basic nonconvertible bonds.

Correct Answer
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Which of the following best describes the sale of warrants and their effects on stockholder's earnings?

Correct Answer
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If a zero correlation of default exists between the different securities and the loan,the equity tranche may have no hope of being paid.

Correct Answer
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Which of the following statements best describes warrants?

Correct Answer
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B

Which factor will NOT affect the price paid on warrants?

Correct Answer
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A

The ultimate credit risk of asset-backed securities lies with the special purpose vehicle that is the central payor.

Correct Answer
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Which of the following is true regarding mortgage-backed security tranches?

Correct Answer
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Which of the following is generally true of convertible issues?

Correct Answer
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Correct Answer
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A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Correct Answer
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The conversion price of a convertible security is fixed and independent of stock market conditions.

Correct Answer
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Which of the following is correct regarding securitization?

Correct Answer
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Exam 16: Capital Market Financing: Hybrid and Other Securities

Convertible bonds typically have a call provision.

Correct AnswerverifiedShow Answer

What is the theoretical value of a warrant when the current price of the stock is $10 and the exercise price is $8? The exchange ratio is three shares for each warrant.

Correct AnswerverifiedShow Answer

Upstate Water Company just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Correct AnswerverifiedShow Answer

Credit default swaps help protection sellers transfer all interest rate risk to the protection buyers.

Correct AnswerverifiedShow Answer

Which of the following is correct regarding the interaction of a firm's share price and the value of issued warrants?

Correct AnswerverifiedShow Answer

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Correct AnswerverifiedShow Answer

Convertible bonds usually have higher credit ratings than the basic nonconvertible bonds.

Correct AnswerverifiedShow Answer

Which of the following best describes the sale of warrants and their effects on stockholder's earnings?

Correct AnswerverifiedShow Answer

If a zero correlation of default exists between the different securities and the loan,the equity tranche may have no hope of being paid.

Correct AnswerverifiedShow Answer

Which of the following statements best describes warrants?

Correct AnswerverifiedB

Which factor will NOT affect the price paid on warrants?

Correct AnswerverifiedA

The ultimate credit risk of asset-backed securities lies with the special purpose vehicle that is the central payor.

Correct AnswerverifiedShow Answer

Which of the following is true regarding mortgage-backed security tranches?

Correct AnswerverifiedShow Answer

Which of the following is generally true of convertible issues?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Correct AnswerverifiedShow Answer

The conversion price of a convertible security is fixed and independent of stock market conditions.

Correct AnswerverifiedShow Answer

Which of the following is correct regarding securitization?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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B

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B

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A

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