Chapter 22: Convertibles, Exchangeables, and Warrants MCQs

Multiple-Choice Quiz

Chapter 22:   Convertibles, Exchangeables, and Warrants

Just click on the button next to each answer and you'll get immediate feedback.

1. A $500 par-value convertible debenture is selling at $520. If the conversion ratio is 20, what is the conversion price?

$19.23

$20.18

$25.00        Correct!

 Conversion ratio = (Face value) / (Conversion price)

 Conversion price = $500 / 20 = $25

$26.00

2. A company has just issued convertible bonds with $1,000 par value and a conversion ratio of 40. Which of the following is most likely to be the market price per share of the company's common stock at present?

Under $25.  Correct!

 At the time of issuance, the convertible security will be priced higher  than its conversion value.  Conversion value equals conversion ratio  times the current market price per share of common stock.  For $1,000 to be  greater than 40 times the current market price per share of common stock, the  stock must be under $25 per share.

$25.

Between $25 and $30.

Above $30.

3. If a warrant carries a right to buy one share of common stock and is exercisable at $20 per common share while the market price of a share is $30, the theoretical value of the warrant is:

$20.

$10.  Correct!

 (1)($30) - $20 = $10

$5.

$0.

4. An exchangeable bond:

can be exchanged for another bond of a different company.

can be exchanged for another bond of the same company.

involves the common stock of another company.

is the same thing as a convertible bond.

5. The call price of a convertible bond is generally

equal to the conversion ratio times the market price per share of common stock.

greater than the face value of the bond.

equal to the face value of the bond divided by the conversion ratio.

equal to the value at maturity.

6. A(n)          is a bond that may be exchanged for common stock of the same corporation.

exchangeable bond

debenture

convertible bond

warrant

7. A warrant is a relatively          option to purchase          at a specified exercise price over a specified period of time.

short-term; bonds

long-term; bonds

short-term; common stock

long-term; common stock

8. Some options have a current theoretical value          and yet         .

that is negative; sell for positive prices

that is positive; have a zero current price

of zero; sell for positive prices

all of the above