FIN 480 UPDATED EVALUATION EXAM QUESTIONS AND
SOLUTIONS GUARANTEE A+
✔✔You own stock in a firm that has a pure discount loan due in six months. The loan
has a face value of $50,000. The assets of the firm are currently worth $62,000. The
stockholders in this firm basically own a _____ option on the assets of the firm with a
strike price of ______ - ✔✔call; $50,000.
✔✔A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option
premium of $3. What is the conversion value if the straight bond value is equal to the
bond's par value? A. $1,062.00 - ✔✔- ANSC. $1,059.00
- Bond value = MAX[Straight bond value, Conversion value] + Option premium $1,062 =
MAX[$1,000, Conversion value] + $3 Conversion value = $1,059
✔✔A convertible bond is selling for $800, matures in 10 years, has a face value of
$1,000, and a coupon rate of 10 percent. Similar nonconvertible bonds are priced to
yield 14 percent. The conversion price is $42.50. The stock currently sells for $31.30 a
share. What is the conversion premium? - ✔✔- 35.78%
- Conversion premium = (Conversion price / Market price) - 1
- Conversion premium = $42.50 / $31.30 - 1
- Conversion premium = .3578, or 35.78%
✔✔A firm has experienced a significant increase in its share value. In retrospect, which
one of the following securities would generally have provided the most benefit to the
firm assuming the securities had been issued prior to the change in share value? -
✔✔ANSD. straight bonds
✔✔Transfer or expropriation of wealth from bondholders to stockholders is less likely to
occur when: - ✔✔convertible debt is issued because the equity component will reduce
agency costs.
✔✔Issuing convertible bonds or bonds with warrants is useful for a company of
unknown risk because: - ✔✔the effects of risk are opposite on the two value
components and tend to cancel each other out.
✔✔A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a
current market price of $22 per share. What would the conversion price and conversion
ratio be if the bond's issuer declared a 3-for-1 stock split? - ✔✔- $9.52; 105
- New conversion ratio = 35 x 3 New conversion ratio = 105 New conversion price =
$1, New conversion price = $9.52
✔✔The lower limit of a warrant's value is defined as: - ✔✔MAX(0, Stock price - Exercise
price).
,✔✔From the bondholder's point of view, the optimum time to convert a convertible bond
is when the bond's conversion value is: - ✔✔greater than the both the call value and
straight bond value on the call date.
✔✔Based on empirical studies, firms tend to call convertible bonds when the conversion
value is: - ✔✔greater than the call price.
✔✔Which one of the following would harm the financial position of a warrant holder? -
✔✔a large cash dividend
✔✔Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently
outstanding. A warrant holder can purchase one new share of stock in exchange for
four warrants plus $20. The stock is currently selling for $20.60 per share. What would
be the gain per new share from exercising the warrants, assuming all warrants are
exercised? - ✔✔- $.51
- Gain per share = (New total value / New total shares) - Exercise price Gain per share
= {[(75,000 × $20.60) + (50,) × $20] / [75,000 + (50,)]} - $20 Gain per
share = $20.51 - 20 Gain per share = $.51
✔✔The upper limit of a warrant's value is best defined as the: - ✔✔underlying stock
price.
✔✔Assuming market efficiency, which one of these is the least sensible explanation of
why convertibles and warrants are issued? - ✔✔The firm is relatively large with a low
level of financial leverage.
✔✔Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised? - ✔✔- 26.67
- Price = Total value / Total shares Price = (60,000 × $27 + 60,000 × $5) / [60,000 +
(60,)] Price = $26.67
✔✔An inverse floater and a super-inverse floater can be more valuable to a purchaser
if: - ✔✔interest rates fall.
✔✔Derivatives can be used to either hedge or speculate. These strategies: - ✔✔offset
risk by hedging and increase risk by speculating
✔✔The duration of a pure discount bond is: - ✔✔is equal to the bond's maturity.
, ✔✔A $1,000 face value Treasury note with a coupon rate of 6 percent matures in one
year and pays interest semiannually. If the effective annual yield for all maturities is 6.5
percent annually, what is the current price of the Treasury note? - ✔✔- $996.21
- Semiannual spot rate = (1 + .065).5 - 1 = .031988
- P0 = [(.06 × $1,000) / 2] / (1 + .031988) + {[(.06 × $1,000) / 2] + $1,000} / (1 +
.031988)2
- P0 = $996.21
✔✔A financial institution has equity equal to one-tenth of its assets. If its asset duration
is currently equal to its liability duration, then to immunize, the firm needs to: -
✔✔decrease the duration of its assets.
✔✔A bond manager who wishes to hold the bonds with the greatest potential volatility
should acquire: - ✔✔long-term, zero-coupon bonds.
✔✔The party most apt to take a long position in agriculture futures is the firm that -
✔✔uses cocoa to make candy.
✔✔Calculate the duration of a $1,000 face value bond with annual coupon payments, a
coupon rate of 7 percent, a maturity of 4 years, and a yield to maturity of 8.2 percent -
✔✔3.62 years
✔✔Caps and floors are used in conjunction with derivatives to: - ✔✔limit any impact
from interest rate changes.
✔✔Which one of these bonds has the highest duration? - ✔✔15-year zero coupon
✔✔You have gathered the following market value and duration information on the
Eastern Bank: Calculate the duration of the bank's assets and of its liabilities. - ✔✔-
2.97 years; 1.23 years
- DA = (3..4)(0) + (7..4)(.6) + (18..4)(2.1) + (9..4)(7.6)
- DA = 2.97 years
- DL = (14..3)(0) + (4..3)(.3) + (11..3)(3.1)
- DL = 1.23 years
✔✔Comparing long-term bonds with short-term bonds, long-term bonds are _____
volatile and therefore experience _____ price change than short-term bonds for the
same interest rate shift. - ✔✔more; more
✔✔Hedging in the futures markets can reduce all risk if: - ✔✔price movements in both
the cash and futures markets are perfectly correlated.
SOLUTIONS GUARANTEE A+
✔✔You own stock in a firm that has a pure discount loan due in six months. The loan
has a face value of $50,000. The assets of the firm are currently worth $62,000. The
stockholders in this firm basically own a _____ option on the assets of the firm with a
strike price of ______ - ✔✔call; $50,000.
✔✔A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option
premium of $3. What is the conversion value if the straight bond value is equal to the
bond's par value? A. $1,062.00 - ✔✔- ANSC. $1,059.00
- Bond value = MAX[Straight bond value, Conversion value] + Option premium $1,062 =
MAX[$1,000, Conversion value] + $3 Conversion value = $1,059
✔✔A convertible bond is selling for $800, matures in 10 years, has a face value of
$1,000, and a coupon rate of 10 percent. Similar nonconvertible bonds are priced to
yield 14 percent. The conversion price is $42.50. The stock currently sells for $31.30 a
share. What is the conversion premium? - ✔✔- 35.78%
- Conversion premium = (Conversion price / Market price) - 1
- Conversion premium = $42.50 / $31.30 - 1
- Conversion premium = .3578, or 35.78%
✔✔A firm has experienced a significant increase in its share value. In retrospect, which
one of the following securities would generally have provided the most benefit to the
firm assuming the securities had been issued prior to the change in share value? -
✔✔ANSD. straight bonds
✔✔Transfer or expropriation of wealth from bondholders to stockholders is less likely to
occur when: - ✔✔convertible debt is issued because the equity component will reduce
agency costs.
✔✔Issuing convertible bonds or bonds with warrants is useful for a company of
unknown risk because: - ✔✔the effects of risk are opposite on the two value
components and tend to cancel each other out.
✔✔A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a
current market price of $22 per share. What would the conversion price and conversion
ratio be if the bond's issuer declared a 3-for-1 stock split? - ✔✔- $9.52; 105
- New conversion ratio = 35 x 3 New conversion ratio = 105 New conversion price =
$1, New conversion price = $9.52
✔✔The lower limit of a warrant's value is defined as: - ✔✔MAX(0, Stock price - Exercise
price).
,✔✔From the bondholder's point of view, the optimum time to convert a convertible bond
is when the bond's conversion value is: - ✔✔greater than the both the call value and
straight bond value on the call date.
✔✔Based on empirical studies, firms tend to call convertible bonds when the conversion
value is: - ✔✔greater than the call price.
✔✔Which one of the following would harm the financial position of a warrant holder? -
✔✔a large cash dividend
✔✔Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently
outstanding. A warrant holder can purchase one new share of stock in exchange for
four warrants plus $20. The stock is currently selling for $20.60 per share. What would
be the gain per new share from exercising the warrants, assuming all warrants are
exercised? - ✔✔- $.51
- Gain per share = (New total value / New total shares) - Exercise price Gain per share
= {[(75,000 × $20.60) + (50,) × $20] / [75,000 + (50,)]} - $20 Gain per
share = $20.51 - 20 Gain per share = $.51
✔✔The upper limit of a warrant's value is best defined as the: - ✔✔underlying stock
price.
✔✔Assuming market efficiency, which one of these is the least sensible explanation of
why convertibles and warrants are issued? - ✔✔The firm is relatively large with a low
level of financial leverage.
✔✔Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised? - ✔✔- 26.67
- Price = Total value / Total shares Price = (60,000 × $27 + 60,000 × $5) / [60,000 +
(60,)] Price = $26.67
✔✔An inverse floater and a super-inverse floater can be more valuable to a purchaser
if: - ✔✔interest rates fall.
✔✔Derivatives can be used to either hedge or speculate. These strategies: - ✔✔offset
risk by hedging and increase risk by speculating
✔✔The duration of a pure discount bond is: - ✔✔is equal to the bond's maturity.
, ✔✔A $1,000 face value Treasury note with a coupon rate of 6 percent matures in one
year and pays interest semiannually. If the effective annual yield for all maturities is 6.5
percent annually, what is the current price of the Treasury note? - ✔✔- $996.21
- Semiannual spot rate = (1 + .065).5 - 1 = .031988
- P0 = [(.06 × $1,000) / 2] / (1 + .031988) + {[(.06 × $1,000) / 2] + $1,000} / (1 +
.031988)2
- P0 = $996.21
✔✔A financial institution has equity equal to one-tenth of its assets. If its asset duration
is currently equal to its liability duration, then to immunize, the firm needs to: -
✔✔decrease the duration of its assets.
✔✔A bond manager who wishes to hold the bonds with the greatest potential volatility
should acquire: - ✔✔long-term, zero-coupon bonds.
✔✔The party most apt to take a long position in agriculture futures is the firm that -
✔✔uses cocoa to make candy.
✔✔Calculate the duration of a $1,000 face value bond with annual coupon payments, a
coupon rate of 7 percent, a maturity of 4 years, and a yield to maturity of 8.2 percent -
✔✔3.62 years
✔✔Caps and floors are used in conjunction with derivatives to: - ✔✔limit any impact
from interest rate changes.
✔✔Which one of these bonds has the highest duration? - ✔✔15-year zero coupon
✔✔You have gathered the following market value and duration information on the
Eastern Bank: Calculate the duration of the bank's assets and of its liabilities. - ✔✔-
2.97 years; 1.23 years
- DA = (3..4)(0) + (7..4)(.6) + (18..4)(2.1) + (9..4)(7.6)
- DA = 2.97 years
- DL = (14..3)(0) + (4..3)(.3) + (11..3)(3.1)
- DL = 1.23 years
✔✔Comparing long-term bonds with short-term bonds, long-term bonds are _____
volatile and therefore experience _____ price change than short-term bonds for the
same interest rate shift. - ✔✔more; more
✔✔Hedging in the futures markets can reduce all risk if: - ✔✔price movements in both
the cash and futures markets are perfectly correlated.
