On January 1 of the current year, Bongo Company issued convertible bonds with $1000 per value and a conversion ratio of 50. Which of the following should be the market price per share of the company's common stock on January 1?
Answer(s): A
The conversion price, in this case $20 ($1,000 ÷ 50 shares), is normally greater than the market price at the time the bonds are issued. Therefore, the market price must be less than $20.
The par value of a common stock represents
Answer(s): B
Par value represents a stock's legal capital. It is an arbitrary value assigned to stock before it is issued. Par value represents a shareholder's liability ceiling because, as long as the par value has been paid in to the corporation, the shareholders obtain the benefits of limited liability.
Each share of nonparticipating, 8%, cumulative preferred stock in a company that meets its dividend obligations has all of the following characteristics except
Dividends on cumulative preferred stock accrue until declared; that is, the book value of the preferred stock increases by the amount of any undeclared dividends. Participating preferred stock participates with common shareholders in excess earnings of the company. In other words, 8% participating preferred stock might pay a dividend each year greater than 8% when the corporation is extremely profitable. Therefore, nonparticipating preferred stock will receive no more than is stated on the face of the stock. Preferred shareholders rarely have voting rights. Voting rights are exchanged for preferences regarding dividends and liquidation of assets.
If a $1,000 bond sells for $1,125, which of the following statements are true?I). The market rate of interest is greater than the coupon rate on the bond.II). The coupon rate on the bond is greater than the market rate of interest.III). The coupon rate and the market rate are equal IV). The bond sells at a premium.IV). The bond sells at a discount.
Answer(s): C
The excess of the price over the face value is a premium. A premium is paid because the coupon rate on the bond is greater than the market rate of interest. In other words, because the bond is paying a higher rate than other similar bonds, its price is bid up by investors.
Debentures are
Debentures are unsecured bonds. Although no assets are mortgaged as security for the bonds, debentures are secured by the full faith and credit of the issuing firm. Debentures are a general obligation of the borrower. Only, companies with the best credit ratings can issue debentures because only the company's credit rating and reputation secure the bonds.
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