5: CORPORATE BONDS (64)

Question 1

A bond convertible at $50 can be converted into ___ shares of common stock

Answer 1

20 shares

Question 2

A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the parity price?

Answer 2

$900

$1000/$50 = 20 shares 
*$45 = 900

Question 3

T/F: [convertible bonds] If the stock is selling for 10% below it’s conversion price, that menas the parity price of the bond must be 10% below par

Answer 3

True

Question 4

An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company’s common stock, what’s the new conversion price:
$11.00
or
$9.09

Answer 4

$9.09

Question 5

A 7% convertible debenture is selling at 101, and it is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. What is the parity price of the debenture?

Answer 5

$920

Question 6

An investor sold a corporate bond with a 5% coupon at a net price of 101. The bond had accrued interest for 45 days. What will be the amount due on the purchaser’s confirmation?

Answer 6

amount due on the purchaser’s confirmation will appear as $1,016.25

“Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 5% coupon, the bond pays $25 every 6 months. One-quarter of that is $6.25, so the total proceeds to the seller (and cost to the purchaser) is the $1,010 plus the $6.25, or $1016.25. One of the details included on a bond confirmation is the yield to maturity based on the price of the bond, but not the current yield.”

Question 7

How many days in a year for accrued interest on corporate bonds?

Answer 7

360 days / year

Question 8

T/F when placing bids for a muni underwriting, bids must be a firm commitment (entire offering)

Answer 8

True
> Standby commitments are used only for corporate stock rights offerings.
>Best efforts commitments are used for corporate securities,
>and an all-or-none commitment is a type of best efforts commitment.

Question 9

T/F: all-or-none commitment is a type of best efforts commitment.

Answer 9

True