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6 Cards in this Set
- Front
- Back
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Give me an example of a parity calculation
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Suppose we had a bond (par value $1,000) that was convertible into 20 shares of common stock.
What do we know so far? CONVERSION RATIO = 20 (because the bond is convertible into 20 shares) PARITY VALUE OF THE COMMON STOCK = $50 per share (because if we convert the bond we'll receive 20 shares and $1,000 / 20 shares = $50 per share). Remember that parity simply means at what price are the bond and the 20 shares of stock equal in value. $1,000 = 20 shares of stock @ $50 per share. Suppose now we are told that the bond increased in value to $1,020. Now what would our new PARITY VALUE FOR THE COMMON STOCK be? Take $1,020 and divide by the CONVERSION RATIO of 20 ($1,020 / 20) = $51 per share parity value. $1,020 = 20 shares of stock @ $51 per share. Everything that you can be asked in the Series 7 regarding conversion, either for a bond ($1,000 par) or preferred shares ($100 par), is a function of understanding this mini tutorial I've just taken you through. |
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Which of the following statements regarding auctions of U.S. Treasury bonds are TRUE?
Bids are submitted on a percentage of par basis. Bids are submitted on a yield basis. Competitive bids are always filled. Noncompetitive bids are always filled. A) I and III. B) I and IV. C) II and IV. D) II and III. |
The correct answer was: II and IV.
When U.S. Treasury bonds are sold at auction, the bids filled are the most favorable bids (lowest yield) submitted by the primary dealers. These bids are called competitive bids and are submitted on a yield basis. Noncompetitive bids, which are made by nonprimary dealers, are guaranteed to be filled at the stop out price. Reference: 2.6.3 in the License Exam Manual. |
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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. |
The correct answer was: $22.50.
The bond is quoted at 90, so it is selling for $900. The parity price of the common stock is $22.50, calculated as follows: the bondholder could convert the bond into 40 shares of stock ($1,000 face amount / $25 per share = 40 shares). Because the bond has a current price of $900, divide $900 by 40 to get the underlying parity price (90% × $25 = $22.50). Reference: 2.5.2.5 in the License Exam Manual. |
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Which of the following money rates are set by banks in competition with one another?
Federal Funds Rate. Discount Rate. Broker Call Loan Rate. Prime Rate. A) I and II. B) I and III. C) II and III. D) III and IV. |
The correct answer was: III and IV.
The Federal Funds Rate is charged by banks to one another. The Discount Rate is set by the Federal Reserve Board. The remaining two rates are charged by banks competing for borrowers. Reference: 2.10.3.2 in the License Exam Manual. |
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If interest rates decline, all of the following are true of a principal-only CMO EXCEPT the:
A) price increases. B) yield decreases. C) price decreases. D) prepayments increase |
Your answer, yield decreases., was incorrect. The correct answer was: price decreases.
Principal-only CMOs, like other debt instruments, respond inversely in price to changes in interest rates. If rates decline, prices rise and yields decrease. As with other mortgage-backed investments, when interest rates decline, refinancing of real estate mortgages causes an increase in prepayments. Reference: 2.8.1.2 in the License Exam Manual. |
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A corporation plans to make a public tender for 50% of its outstanding subordinated debentures. The price of the tender will be set by the:
A) trustee. B) issuer. C) paying agent. D) transfer agent. |
The correct answer was: issuer.
In a tender offer, the issuer is offering to buy back all or a portion of the issue at a stated price. The price of the tender is set by the issuer although the issuer may engage an underwriter to help it set the price. Reference: 2.1.7.4 in the License Exam Manual. |
