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Exam 16: Capital Market Financing: Hybrid and Other Securities

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Question 31

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The design of stepped-up exercise prices is to control the timing of equity capital raised for the firm.

A) True
B) False

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Question 32

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Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

A) 7.83%
B) 8.24%
C) 8.65%
D) 9.08%

E) A) and B)
F) B) and C)

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Question 33

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A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

ABC Bank enters a credit default swap of $10 million for 5 years with XYZ Insurance. How much does ABC have to pay with a premium rate of 2.5% per year?

The ABC Bank enters into a credit default swap with XYZ Financial. The swap runs for 5 years and is based upon a term loan to LMN Corp. The size of the protection payment is 5% per year. Unfortunately, LMN goes bankrupt a year after this swap agreement becomes effective. Even with a 75% recovery value on the underlying loan, XYZ has paid ABC $20 million for settlements. How much has ABC lent to LMN?

The "misused" asset securitizations, credit derivatives, and CDOs took the blame for creating the credit crisis of 2007.

Who or what is (are) the legal asset owner(s) behind home mortgage securitization?

Which circumstance will decrease the protection payment for credit default swaps?

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

Convertible bonds usually have higher credit ratings than the basic non-convertible bonds.

The ABC Bank enters into a credit default swap with XYZ Financial. The notional amount of the swap is $50 million. The 5-year swap is based upon a 5-year loan to LMN Corp. The size of the protection payment is 3% per year. As LMN bankrupts during the time this swap is still valid, XYZ has paid ABC $22.5 million for settlements. What is the recovery ratio on the underlying loan?

A detachable warrant is a warrant that can be detached and traded separately from the security with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.