Question 1

 The difference between the straight bond value and its face value may give rise to
Discount or premium

Question 2
 A trader sells 100 European put options with a strike price of $50 and a time to
maturity of six months. Each option involves one unit of the underlying asset. The price
received for each option is $4. The price of the underlying asset is $41 in six months.
What is the trader’s profit (loss)? _____
(50-41) x1000 = 900
4x100 = (400)
Loss 500

Question 3
 Refer to the given data below

Total issue price of bonds with warrants 6,000,000

Present value of bonds 5,250,000
Face value of bonds 5,000,000

What is the total amount of discount based on the given data? NONE

Question 4
 An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree
that
the firm’s stock price may increase to $45 per share in the next 4 months. As an alternative, the
investor could purchase a 120-day call option at a striking price of $30 for $5,000. At what stock
price would the investor break even?40

Question 5
 Your company wants to purchase a new network file server for its wide-area computer network.
The server costs $75,000. It will be completely obsolete in three years. Your options are to
borrow the money at 10 percent or to lease the machine. If you lease, the payments will be
$27,000 per year, payable at the beginning of each for the next three years. If you buy the server,
you can depreciate it straight-line to zero over three years. The tax rate is 34 percent. Compute
for the net present value under the purchase alternative.

Note: Round off PV factor at 4 decimal places while final answers and after tax cost of debt at 2
decimal places.
Score: 1 out of 1 Yes

Question 6
 A firm has outstanding warrants that are exercisable at $53 per share and entitle holders to
purchase
two shares of common stock. The common stock is currently selling for $55 per share. The
theoretical value of the warrant is
(55-53) x 2= 4

Question 7
 A firm currently has outstanding a 9 percent, $1,000 convertible bond. The bond is convertible
into
100 shares of common stock at a conversion price of $10 per share and callable at $1,090. The
current market price of the firm’s stock is $12 per share. The bond holder will most likely
CONVERT THE BOND INTO STOCK REALIZING 200 OVER PAR VALUE

Question 8
 A trader buys 100 European call options with a strike price of $20 and a time to
maturity of one year. Each option involves one unit of the underlying asset. The cost of
each option or option premium is $2. The price of the underlying asset proves to be $25
in one year. What is the trader’s profit (loss)? _____
(20-25) x 100 = 500
2 x 100 = 200
Gain 300

Question 9
 A firm has an outstanding 15-year convertible bond issue with a $1,000 par value and a stated
annual interest rate of 7 percent. The bond is convertible into 50 shares of common stock which
has
a current market price of $25. A straight bond could have been sold with a 10 percent stated
interest
rate. The straight value of the bond is
1000x7% = 70 x 7.6061 = 532.43
1000 x 0.2394 = 239.4
Straight value of bond 771.83
PV 10% for 15yrs

Question 10
 Your company wants to purchase a new network file server for its wide-area computer network.
The server costs $75,000. It will be completely obsolete in three years. Your options are to
borrow the money at 10 percent or to lease the machine. If you lease, the payments will be
$27,000 per year, payable at the beginning of each for the next three years. If you buy the server,
you can depreciate it straight-line to zero over three years. The tax rate is 34 percent. Should you
lease or buy the new network?
Note: Round off PV factor at 4 decimal places while final answers and after tax cost of debt at 2
decimal places.
Score: 0 out of 1 No

Question 11
 A warrant is attached to a $1,000 par, 10 percent, 10-year bond, paying annual interest and
having
20 warrants attached for the purchase of the firm’s stock. The bonds were initially sold for
$1,200.
When issued, similar risk, straight bonds were selling at a 14 percent rate of return. The implied
price of the warrant is
1000 x 10% = 100 x 5.2161 = 521.61
1000 x 0.2697 = 269.7
521.61+269.7= 791.31
1200-791.31= 408.69/10 = 20.4
PV 14% 10 yrs

Question 12
 An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree
that
the firm’s stock price may increase to $45 per share in the next four months. As an alternative,
the
investor could purchase a 120-day call option at a striking price of $30 for $5,000. What profit
would the investor realize if the stock price increased to $42 per share?
(42-30) –(5000/500) = 2 x 500 = 1000

Question 13
 Old Cycle Corporation (OCC), publisher of Ancient Iron magazine, has a convertible bond issue
that is currently selling in the market for $950. Each bond can be exchanged for 100 shares of
stock at the holder’s option.
The bond has a 7 percent coupon, payable annually, and it will mature in 10 years. OCC’s debt is
BBB-rated.
Debt with this rating is priced to yield 12 percent. Stock in OCC is trading at $7 per share.

What is the conversion ratio on this bond? 100

The conversion price? 1000/100= 10
The conversion premium in percentage? (10-7)/7 = 43% (answer in percentage, no space
between the number and percentage)
What is the floor value of the bond?
1000x7% = 70 x 5.6502… = 395.52
1000 x 0.32197… = 321.97
Floor value 717.49
PV 12% 10yrs
What is the market premium? 950-717.49=232.51

Question 14
 A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share of
common stock. If the current market value of common stock per share is $45, the conversion
value of the bond is
1000/40= 25 x 45 = 1125

Question 15
 An investor has $1,000 that she is interested in investing in ABC stock, which is currently
selling for
$10 per share. ABC’s warrants are selling for $7 per warrant. Each warrant entitles the holder to
purchase three shares of ABC’s common stock for $8 per share. The warrant premium is (10-8)
x3 = 6-7 = 1

Question 16
 Your company wants to purchase a new network file server for its wide-area computer network.
The server costs $75,000. It will be completely obsolete in three years. Your options are to
borrow the money at 10 percent or to lease the machine. If you lease, the payments will be
$27,000 per year, payable at the beginning of each for the next three years. If you buy the server,
you can depreciate it straight-line to zero over three years. The tax rate is 34 percent. Compute
for the net present value under the lease alternative.

Note: Round off PV factor at 4 decimal places while final answers and after tax cost of debt at 2
decimal places.
Score: 0 out of 1 No

Question 17
 Your company wants to purchase a new network file server for its wide-area computer network.
The server costs $75,000. It will be completely obsolete in three years. Your options are to
borrow the money at 10 percent or to lease the machine. If you lease, the payments will be
$27,000 per year, payable at the beginning of each for the next three years. If you buy the server,
you can depreciate it straight-line to zero over three years. The tax rate is 34 percent. In order to
arrive at a break even net advantage, how much is the applicable annual lease payments after
tax?

Note: Round off PV factor at 4 decimal places while final answers and after tax cost of debt at 2
decimal places.
Score: 0 out of 2 No
Question 18
 Refer to the given data below

Total issue price of bonds with warrants 6,000,000

Present value of bonds 4,650,000
Face value of bonds 5,000,000

The total residual amount allocated to share warrants is

6000000- 4650000= 1350000

Question 19
 A firm has an outstanding bond with a $1,000 par value that is convertible into 50 shares of
common
stock. The bond’s conversion ratio is
1000/50= 20

Question 20
 Your company wants to purchase a new network file server for its wide-area computer network.
The server costs $75,000. It will be completely obsolete in three years. Your options are to
borrow the money at 10 percent or to lease the machine. If you lease, the payments will be
$27,000 per year, payable at the beginning of each for the next three years. If you buy the server,
you can depreciate it straight-line to zero over three years. The tax rate is 34 percent. In order to
arrive at a break even net advantage, how much is the applicable annual depreciation after tax
shield?

Note: Round off PV factor at 4 decimal places while final answers and after tax cost of debt at 2
decimal places.
Score: 2 out of 2 Yes

Question 21
 A firm has an outstanding bond with a $1,000 par value that is convertible into 50 shares of
common
stock. The bond’s conversion price per share is
1000/50=20

Question 22
 Tangshan Mining Company has an outstanding issue of convertible bonds with a $1,000 par
value.
The bonds have a 10 percent coupon rate, have a 10-year maturity, and are convertible into 100
shares of common stock. The yield to maturity on bonds of similar risk is 10 percent and the
market
price of the firm’s common stock is currently $15.00. Based on this information, the conversion
value of the bond is
Score: 0 out of 1 No

Question 23
 Tangshan Mining Company has an outstanding issue of convertible bonds with a $1,000 par
value.
The bonds have a 10 percent coupon rate, have a 10-year maturity, and are convertible into 100
shares of common stock. The yield to maturity on bonds of similar risk is 10 percent. Based on
this
information, the straight bond value of the bond is
1000x10% = 100 x 6.1446… = 614.46
1000 x 0.3855… = 385.54
Straight bond value of bond 1000
PV 10% for 10 yrs