Multiple Choice Answers

1.   The conversion ratio is the:
a. price at which a convertible security is exchanged into common stock
b. ratio of conversion value to market value of a convertible security
c. number of shares of common stock into which the convertible may be converted.
d. ratio of the conversion premium to market value of a convertible security


2. In determining the cost of bank financing, which is the important factor?
a. Prime rate
b. Nominal rate
c. Effective rate
d.Discount rate
3. Holland Construction Co has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5 percent. The company is required to maintain a 15% compensation balance in its checking account. What is the effective interest rate on the loan? Assume the company would NOT normally maintain this average amount.
a. 11.8%
b. 19%
c. 22.35%
4. Which of the following is the largest category of asset-backed securities?
a.Student loans
b.Automobile loans
c. Home equity loan
d. Manufactured housing loans
5. What is the effective rate on a $10,000 installment loan with a bi-monthly payments, $1,600 in interest, for 2 yrs?
a. 16%
b. 7.4%
c. 29.5%
d. 14.8%
6. During the next ten yrs, the major threat to the dominance of the US money and capital markets will come from:
a. Russias difficulty in transforming its economy into a capitalistic one
b. Japans prolonged recession and banking crisis
c.the Euro-zone countries comprising the European Monetary Union and a single currency.
d. the huge Chinese economy and its billion-plus people.

7. In general when interest rates are expected to rise, financial managers:
a. try to lock in long-term financing at low cost
b. balance the companys debt structure with more short-term debt and less long-term.
c. accept more risk
d. rely more on internal sources of funds rather than external sources
8. The major supplier of funds for investment in the whole economy is:
a. busniess
b. households
c. government
d. financial institutes

9. What type of trading accounts for over 90% of stocks traded on the Chicago and Pacific regional exchanges? trading
b. dual trading
c. options trading
d. none of the above
10. The Securities Act of 1933 is primarily concerned with:
a. original issues of securities
b. secondary trading of securities
c. national securities market
d. protecting customers of bankrupt securities firms

11. The belief in the efficient market hypothesis would lead to the following:
a. attempting to time the market
b. increase in index funds
c. using technical analysis and trends in the market
d. investing based on the emotional climate
12. A convertible bond is currently selling for $945. It is convertible into 15 shares of common stock that presently sell for $57 per share. What is the conversion premium?
a. $90
b. $45
c. 57 shares
d. 13 shares
13.  Libor is:
a. a resource used in production
b. an interest paid on Eurodollar loans in the London market
c. an interest rate paid by European firms when they borrow Eurodollar deposits from US banks
d. the interest rate paid by the British government on its long-term bonds.

14. The conversion premium will be large:
a. if investors have great expectations for the price of the common stock
b. if interested rates decline
c. when the conversion value is much greater than the pure bond value
d. when the stock price is very stable
15. Conversion price is usually set__________the prevailing market price of the common stock at the time the bond issue is sold.
a. at
b. below
c. above
d. one half
16. A $1,000 par value bond with a conversion price of $40 has a conversion ratio of:
a. $25
b.25 shares
d. 40 shares
17. The theoretical floor value for a convertible bond is its:
a. conversion price
b. conversion value
c. par value
d. pure bond value
18. The conversion premium is the greatest and the downside risk the smallest when the:
a.conversion value equals the pure bond value
b. conversion value is greater than the pure bond value
c. conversion value is less than the pure bond value
d.conversion value is less than the pure bond value
19. The interest rate on convertibles is generally________the interest rate on similar nonconvertible instruments.
a. greater than
b. less than
c. the same as
d. at least twice
20. A convertible bond is currently selling for $1, 335. It is convertible into 20 shares of common stock that presently sell for $56 per share. What is the conversion premium?
a. $335
b. $215
c. 66.74shares
d.23.8 shares