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Financial Management: Advanced Topics in Bonds, Leases, and Currency Markets

A financial management project focused on advanced topics in bonds, leases, and currency markets.

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    Financial Management: Advanced Topics in Bonds, Leases, and Currency Markets, page 1Financial Management: Advanced Topics in Bonds, Leases, andCurrency MarketsQuestion 11.Moniker Manufacturing's bonds were recently issued at their $1,000 par value. At anytime prior to maturity (20 years from now), a bondholder can exchange abond for a shareof common stock at a conversion price of $40. What is the conversion ratio?Answer22.5623.7525.0026.2527.563.3333pointsAnswer:23.75Question 2Suppose in the spot market 1 U.S. dollar equals 1.75 Canadian dollars. 6-month Canadiansecurities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the180-day forward market? In other words, how many Canadian dollars are required topurchase one U.S. dollar in the 180-day forward market?Answer1.27271.41411.57121.74581.92033.3333pointsAnswer:1.7458Question 3Curry Corporation is setting the terms on a new issue of bonds with warrants. The bondswill have a 30-year maturity and annual interest payments. Each bond will come with 20

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    Financial Management: Advanced Topics in Bonds, Leases, and Currency Markets, page 2

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    Financial Management: Advanced Topics in Bonds, Leases, and Currency Markets, page 3warrants that give the holder the right to purchase one share of stock per warrant. Theinvestment bankers estimate that each warrant will have a value of $10.00. A similarstraight-debt issue would require a 10% coupon. What coupon rate should be set on thebonds-with-warrants so that the package would sell for $1,000?Answer6.75%7.11%7.48%7.88%8.27%3.3333pointsAnswer:7.88%Question 41.A call option whose underlying stock value is less than the corresponding exercise priceis anexample of a(n)AnswerStraddle option.Put option.Out-of-the-money option.Naked option.Covered option.3.3333pointsAnswer:Out-of-the-money optionQuestion 51.Cannon Manufacturing is considering issuing 15-year, 8% annual coupon,$1,000 facevalue convertible bonds at a price of $1,000 each. Each bond would be convertible into25 shares of common stock. If the bonds were not convertible, investors would require anannual yield of 10%. The stock's current price is $25.00, its expected dividend is $2.50,and its expected growth rate is 5%. The bonds are noncallable for 10 years. What is thebond's conversion value in Year 5?Answer$719.90$757.79$797.68$837.56$879.44

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    Financial Management: Advanced Topics in Bonds, Leases, and Currency Markets, page 43.3333pointsAnswer:$797.68Question 61.Herbert Engineering is issuing new 15-year bonds that have warrants attached. If not fortheattached warrants, the bonds would carry a 9% annual interest rate. However, with thewarrants attached the bonds will pay a 6% annual coupon. There are 30 warrants attachedto each bond, which has a par value of $1,000. What is the value of the straight-debtportion of the bonds?Answer$720.27$758.18$796.09$835.89$877.693.3333pointsAnswer:$758.18Question 71.Which of the following is most CORRECT?AnswerFirms that use "off-balance-sheet" financing, such as leasing, would show lower debtratios if the effects of their leases were reflected in their financial statements.Capitalizing a lease means that the firm issues equity capital in proportion to itscurrent capital structure, in an amountsufficient to support the lease paymentobligation.The fixed charges associated with a lease can be as high as, but never greater than,the fixed payments associated with a loan.Capital, or financial, leases generally provide for maintenance by the lessor.A key difference between a capital lease and an operating lease is that with a capitallease, the lease payments provide the lessor with a return of the funds invested in theasset plus a return on the invested funds, whereas with an operating lease the lessordepends on the residual value to realize a full return of and on the investment.3.3333pointsAnswer:A key difference between a capital lease and an operating lease is that witha capital lease, the lease payments provide the lessor with a return of the fundsinvested in the asset plus a return on the invested funds, whereas with an operating

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