See attached file.
long-term options to sell shares of the issuing firm's stock.
fairly stable, low-risk investments.
investments whose value is directly related to the price of the underlying stock.
structured to sell for precisely their intrinsic value.
A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is
a common stock.
a capital investment.
The principle device used by the corporation to force conversion
is setting the conversion price above the current market price.
is reducing the amount of interest payments.
is buying bonds back at below par value.
is a call provision.
A convertible bond is currently selling for $1335. It is convertible into 20 shares of common which presently sell for $56 per
share. The conversion premium is
The theoretical floor value for a convertible bond is its
pure bond value.
The computation of basic earnings per share will include consideration of
all convertible securities.
only common shares outstanding.
all shares outstanding and all convertible securities.
only preferred shares outstanding.
A disadvantage to the investor of a convertible bond is all of the following, EXCEPT that
the stock price may never rise above conversion price.
if interest rates rise, the pure bond value (floor price) will decline.
the interest rate on convertibles is generally one-third below the coupon rate on straight bonds of similar risk.
all bonds are callable at a specific price above par.
A derivative is a financial instrument whose value is determined by
a regulatory body such as the SEC.
an underlying security
futures and options
the Securities Exchange Commission.
Which contract is an option?
both A and B are options.
The interest rate on convertibles is generally ____________ the interest rate on similar nonconvertible instruments.
the same as
at least twice
The intrinsic value of a warrant to buy 5 shares of Jimmy Corp. stock at $70 per share is $25. What is the current market
price of Jimmy Corp. stock? (Show your work/calculations/formulas).
When a corporation decides to sell its financial products within the marketplace, there is still underlying competition from
others. Explain some of the factors found within the idea of "competition of funds".
In order to answer each question, I will provide you with information that will assist you to do same. Information is given for each question.
As it relates to question 1, warrants are investments whose value is directly related to the price of the underlying stock. You may note the following excerpt below which provides you with more information on warrants:
"A warrant is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors."
"The market value of a stock warrant is composed of two components:
? Intrinsic value - which is the difference between the exercise (strike) price and the underlying stock price. If the stock price is below the strike price, the stock warrant has no intrinsic value - only time value. It is 'out-of-the-money'. If the opposite situation exists, the warrant has intrinsic value and is 'in-the-money'.
? Time value - can be described as the value of the continuing exposure to the variation in the stock that the warrant provides. Time value declines (referred to as time decay) as warrant expiration approaches. The longer the time to expiry, the greater the time value of the warrant.
The more volatile the underlying stock price is, the higher the price of the warrant will be, as the warrant is more likely to end up 'in-the-money'. Weighing up these two influences allows the investor to form a view as to the value of an investment."
In question 2, a contract which gives the owner the right to buy and sell an asset at a fixed price for a given period of time is called an option. This is by definition.
For question 3, a forced conversion implies that there might come a time when a corporation may want to recall its bonds and retire them or convert them to shares. Among the various types of bonds are callable bonds and non-callable bonds. Callable bonds normally have a call provision in place (which allows for conversion), whereas non-callable bonds do not have one. You may note the following excerpt to answer this question:
"A provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bonds is called a call provision. If there is a call provision in place, it will typically come with a time window under which the bond can be called, and a specific price to be paid to bondholders and any accrued interest are defined. Callable bonds will pay a higher yield than comparable non-callable bonds. Note too that, a bond call will almost ...
This solution include responses to a set of multiple choice and short-answer questions related to warrants and their market price, contracts, conversion premium, basic EPS, derivatives, options, convertible bonds/securities, and competition of funds. Note, references are provided.