Chapter 25 : Convertible Securities (Theories)

None

An increase in interest rates and declining stock prices suggests that a convertible bond's coupon (Inc/Dec/Non)

Decrease

An increase in interest rates and lower stock prices (Inc/Dec/Non) the price of a convertible bond

Increase

As the price of stock increases, the conversion value of the bond (Inc/Dec)

Decrease

As the probability of a call increases, the willingness to pay a premium over the bond's value as stock (Inc/Dec)

True

At sufficiently high stock prices, the market price of the bond is identical with its conversion value. True or False?

Convertible Bonds

Bonds that may be converted into stock at the option of the bondholder. These are debentures that may be converted at the holder's option into the stock of the issuing company

False. Always callable

Convertible bonds are always callable but convertible preferred stocks are not always callable. True or False?

False. Always callable

Convertible bonds are not always callable. True or False?

False. Nope

Convertible bonds are safer than senior debt or debt that is secured by specific collateral. True or False?

True

Convertible bonds offer investors the opportunity for some capital growth with less risk. True or False?

True

Convertible bonds tend to offer a lower rate of interest. True or False?

False. Not the only potential source of risk

Default is the only potential source of risk to investors. True or False?

True

If price of the stock < exercise price of the bond, the market price of convertible bond would be influenced primarily by the bond's value as nonconvertible debt. In effect, the bond would be priced as if it were a pure debt instrument. True or False?

Decrease

If the intrinsic value of a convertible bond as stock decreased, that implies the price of the stock (Inc/Dec/Non)

True

If the price of the bond were less than its value as stock, an opportunity for profit would exist. True or False?

False. No value

If the stock has no value, the value of the bond in terms of stock still has value. True or False?

True

In the case of the price of a bond as nonconvertible debt, it is independent of the value of the stock. True or False?

True

One way to analyze a convertible bond is to measure the premium over the bond's value as debt or as stock. True or False?

False. Equity instrument

Preferred stock is a debt instrument. True or False?

Convertible Preferred Stock

Preferred stock that may be converted into common stock at the option of the holder

True

Since the premium declines as the price of the stock rises, the rate of increase in the price of the stock must exceed the rate of increase in the price of the bond. True or False?

True

The actual minimum price of a convertible bond combines its value as stock and its value as debt. True or False?

True

The bond's value as nonconvertible debt is a floor on the price of the convertible bond. Even if the value of the stock into which the bond may be converted were to fall, this floor would halt the decline in the price of the convertible bond. True or False?

Increase

The decline in the premium over the bond's value as stock means that the price of the stock will (Inc/Dec) more rapidly than the price of the bond

Increase

The intrinsic value of a convertible bond as stock (Inc/Dec/Non) as the price of the stock increases

False. Cannot be

The market price of a convertible bond can be less than the bond's conversion value as stock. True or False?

True

The market price of a convertible bond will be at least equal to its conversion value. True or False?

True

The market price of the convertible bond as a hybrid security is influenced by the bond's value both as nonconvertible debt and as stock. True or False?

True

The market price of the convertible bond combines both the conversion value of the bond and its value as nonconvertible debt. True or False?

False. It does not

The market price of the convertible bond rises as rapidly as the conversion value of the bond. True or False?

True

The maturity date of convertible bonds is irrelevant because the bonds are retired when they are converted. True or False?

True

The minimum value of the convertible preferred stock must be equal to the conversion value of the stock. True or False?

True

The number of shares into which the bond can be converted to times the market price of a share gives the value of the bond in terms of stock. True or False?

Increase

The premium over a convertible bond's value as debt (Inc/Dec/Non) as the price of the underlying stock rises

Decrease

The premium over a convertible bond's value as stock (Inc/Dec/Non) as the price of the underlying stock rises

Increases

The premium over the bond's value as debt (Inc/Dec) as stock price increases

Decreases

The premium over the bond's value as stock (Inc/Dec) as stock price increases

1.Premium over the bond's value as stock 2.Premium over the bonds value as debt

The premium that an investor pays for a convertible bond may be viewed in either of two ways: (2)

True

The primary reason for buying a convertible bond is to participate in any increase in the price of the stock. True or False?

True

The principal divided by the conversion price of the bond gives the number of shares into which the bond may be converted. True or False?

Decrease

The return on an investment in a convertible security (Inc/Dec/Non) as interest rates increase

1.Principal amount/Face value of the bond 2.Conversion(Exercise) price per share of the bond 3.Market price of the common stock

The value of a convertible bond IN TERMS OF THE STOCK into which it may be converted depends upon? (3)

Decrease

The value of a convertible bond as debt (Inc/Dec/Non) as interest rates increase

None

The value of a convertible bond as debt (Inc/Dec/Non) as the price of the stock increases

1.The annual interest or coupon rate that the bond pays 2.The current interest rate being paid on comparable nonconvertible debt 3.The requirement that the principal or face value be retired at maturity if the bond is not converted

The value of a convertible bond as debt is related to? (3)

1.The value of the stock into which it may be converted 2.The value of the bond as a debt instrument

The value of a convertible bond is derived from? (2)

Decrease

The value of a convertible preferred stock (Inc/Dec/Non) as the price of the underlying stock declines

True

The value of he bond as debt varies inversely with interest rates. True or False?

False. It is important

The value of the bond as nonconvertible debt is not important. True or False?

True

The value of the bond in terms of stock sets the minimum price of the bond. True or False?

True

The value of the convertible bond as debt varies with market interest rates. True or False?

1.Safety of debt 2.Potential for capital gain

These two(2) advantages are the reasons why convertible bonds are attractive investments

True

When the price of the stock is low and the bond is selling close to its value as debt, the premium above the bond's value as stock is substantial, but the premium above the bond's value as debt is small. True or False?

When Market Price of Stock(MP/S) > Exercise Price(EP)

When will the value of the bond as stock be greater than the principal amount?

When Exercise Price(EP) = Market Price of Stock (MP/S)

When will the value of the bond as stock equal to the principal amount?