A firm is planning to issue a callable bond with an 8% coupon rate and 10 years to maturity. A straight bond with a similar rate is priced at $1,000. If the value of the issuer's call option is estimated to be $50, what is the value of the callable bond?
Answer(s): B
A callable bond is not as valuable to an investor as a straight bond. Thus, the $50 call option is subtracted from the $1,000 value of a straight bond to arrive at a $950 value for the callable bond.
In capital markets, the primary market is concerned with the provision of new funds for capital investments through
Answer(s): A
The primary market is the market for new stocks and bonds In this market, wherein investment money flows directly to the issuer, securities are initially sold by investment bankers who purchase them from issuers and sell them through an underwriting group. Later transactions occur on securities exchanges or other markets.
The term `underwriting spread" refers to the
Answer(s): C
An investment banker performs an underwriting or insurance function when it purchases an issue of securities and then resells them. The risk of price fluctuations during the distribution period is borne entirely by the investment banker. Investment banking is also an efficient vehicle for marketing the securities because investment bankers are specialists in such activities The profit earned is the underwriting spread, or the difference between the purchase and resale prices of the securities (effectively, the wholesale and retail prices).
In general, it is more expensive for a company to finance with equity capital than with debt capital because
Providers of equity capital are exposed to more risk than are lenders because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed.
The equity section of Smith Corporation's Statement of Financial Position is presented below.Preferred stock, $100 par $12,000,000Common stock, $5 par 10,000,000Paid-in capital in excess of par 18,000,000Retained earnings 9,000000Net worth $49,000,000The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues 400,000 additional shares of common stock at $6 per share, a current holder of 20,000 shares of Smith Corporation's common stock must be given the option to buy
Common shareholders usually have preemptive rights, which means they have first right to purchase any new issues of stock in proportion to their current ownership percentages. The purpose of a preemptive right is to allow stockholders to maintain their current percentages of ownership. Given that Smith had 2,000,000 shares outstanding ($10,000,000÷ $5 par), an investor with 20.000 shares has a 1% ownership. Hence, this investor must be allowed to purchase 4,000 (400,000 shares x 1%) of the additional shares.
Post your Comments and Discuss Financial CMA exam prep with other Community members:
Our website is free, but we have to fight against AI bots and content theft. We're sorry for the inconvenience caused by these security measures. You can access the rest of the CMA content, but please register or login to continue.