Test for Chapter 24

If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be

• putable

• callable

• protected

• inflated

• convertible

The upper limit of a warrant's value is best defined as the

• MAX(0, Stock price − Exercise price)

• exercise price

• MIN(0, Stock price − Exercise price)

• underlying stock price

• MAX(0, Exercise price − Stock price)

Warrants are most often issued in combination with new

• shares of preferred stock

• privately placed shares of common stock

• publicly placed shares of common stock

• privately placed bonds

• publicly placed bonds

The lower limit of a warrant's value is defined as

• MAX(0, Stock price − Exercise price)

• MIN(0, Stock price − Exercise price)

• MAX(0, Exercise price − Stock price)

• zero

• MIN(0, Exercise price − Stock price)

The upper limit of a warrant's value is best defined as the

• MAX(0, Stock price − Exercise price)

• underlying stock price

• exercise price

• MAX(0, Exercise price − Stock price)

• MIN(0, Stock price − Exercise price)

Bright View Windows issued warrants with an exercise price of $17. Bright View's common stock currently sells for $16 per share. The warrants are

• not very valuable

• out of the money

• valuable

• both in the money and valuable

• in the money

Assume a firm issues convertible bonds at a time when the risk of the firm is difficult to properly assess. If the rm is subsequently determined to have low risk, then the

• straight bond component of the convertible bond will have high value

• conversion value will always exceed the straight bond value

• the firm will eliminate the conversion option

• call option of the convertible bond will have high value

• bond should be immediately converted

Warrants generally

• expire within 30 days

• remain attached to their original security until the expiration date

• have longer maturity periods than calls

• increase in value when the underlying stock price decreases

• cannot be detached

The holder of a $1,000 face value bond has the right to exchange the bond any time prior to maturity for shares of stock priced at $50 per share. The $50 is called the

• conversion price

• stated price

• striking price

• par value

• exercise price

Which one of these features applies to call options but not to warrants?

• Value based on underlying asset

• Absolute minimum value of zero

• Issued by individuals

• Exercise price

• Market value that changes