PDQ Corporation has a 6-1/4% convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust:

A) the conversion price to $27.50.

B) the conversion price to $22.72.

C) the par to $110.

D) the par to $90.

Answer: B) the conversion price to $22.72.

A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is:

A) $18.

B) $14.

C) $12.

D) $16.

Answer: B) $14.

A convertible bond has a conversion price of $40 per share. If the market value of the bond rises to a 12½ point premium over par, which of the following are TRUE?

Conversion ratio is 25:1.

Conversion ratio is 28:1.

Parity price of the common stock is $42.

Parity price of the common stock is $45.

A) II and IV.

B) I and IV.

C) I and III.

D) II and III.

Answer: B) I and IV.

A customer owns a 7-½% ABC convertible bond currently trading at 115. The conversion price is $40. What is the parity price of the common?

A) $46.

B) $28.75.

C) $34.

D) $44.

Answer: A) $46.

All of the following statements regarding convertible bonds are true EXCEPT:

A) the issuer pays a lower interest rate.

B) holders have a fixed interest rate.

C) holders receive a higher interest rate.

D) holders may share in the growth of the common stock.

Answer: C) holders receive a higher interest rate.

Which of the following statements regarding convertible bonds is NOT true?

A) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature.

B) Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

C) Convertible bondholders are creditors of the corporation.

D) Coupon rates are usually lower than nonconvertible bond rates of the same issuer.

Answer: B) Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

ABC Company issues a 10% bond due in 10 years. The bond is convertible into ABC common stock at a conversion price of $25 per share. The ABC bond is quoted at 90. Parity of the common stock is:

A) $25.00.

B) $36.00.

C) $100.00.

D) $22.50.

Answer: D) $22.50.

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should:

A) sell the bonds at the current market price.

B) continue to hold the bonds.

C) convert the bonds into common and sell the converted shares.

D) tender the bonds.

Answer: D) tender the bonds.

A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be:

A) $43.91. B) $25.25. C) $25.00. D) $40.00.

Answer: B) $25.25.

An investor purchases an ABC Corporation convertible bond at 98 on June 18, 1997. The bond is convertible at $25 and the investor converts his bond into the stock on June 19, 1998, when the common stock is trading at $26 per share. For tax purposes, these transactions will result in:

A) a $60 capital gainz.

B) neither gain nor loss.

C) a $40 capital loss.

D) a $40 capital gain.

Answer: B) neither gain nor loss.

All of the following securities are exempt from the Trust Indenture Act of 1939 EXCEPT:

A) municipal bonds.

B) preferred stock.

C) debentures.

D) Treasury bonds.

Answer: C) debentures.

Bond trust indentures are required for:

A) corporate debt securities.

B) municipal general obligation bonds.

C) municipal revenue bonds.

D) Treasury securities.

Answer: A) corporate debt securities.

Which one of the following best describes a debenture?

A) An investment in the debt of another corporate party.

B) A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity.

C) A long-term corporate debt obligation with a claim against securities rather than against physical assets.

D) Unsecured corporate debt.

Answer: D) Unsecured corporate debt.

If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and:

A) original cost.

B) par value.

C) discounted value.

D) accreted value.

Answer: D) accreted value.

Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11-1/4% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include:

A) she should not be concerned as the bonds will be first in liquidation.

B) the issue may be junior-in-lien to another security issue.

C) the new barges might sink, and the collateral would be gone.

D) the company might demand that she accept common stock for her bond.

Answer: B) the issue may be junior-in-lien to another security issue

An investor seeking a high level of income combined with a moderate level of risk would purchase:

A) mortgage bonds.

B) convertible bonds.

C) income bonds.

D) junk bonds.

Answer: A) mortgage bonds.

Equipment trust certificates are commonly issued by:

A) the U.S. government.

B) transportation companies.

C) utilities.

D) political subdivisions.

Answer: B) transportation companies.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following EXCEPT:

A) convertible bonds.

B) adjustment bonds.

C) variable rate bonds.

D) nonconvertible bonds.

Answer: B) adjustment bonds.

Which of the following debt instruments is unsecured?

A) Collateral trust certificates.

B) Equipment trust certificates.

C) Aaa/AAA rated debentures.

D) Junior lien mortgage bonds.

Answer: C) Aaa/AAA rated debentures.

Rank the following from first to last in order of payment at liquidation of a corporation.

General creditors.

Preferred stock.

Subordinated debentures.

Accrued taxes.

A) IV, I, III, II.

B) III, IV, I, II.

C) III, IV, II, I.

D) IV, III, I, II.

Answer: A) IV, I, III, II.