Question

1. The conversion ratio is:​

	a.	​the number of new lower coupon rate bonds that the bondholder receives for old bonds.
	b.	​the ratio of the face value of the bond to its market value.
	c.	​the number of shares of stock that the bondholder receives upon conversion.
	d.	​the ratio of the bond's old face value to its new face value.
	e.	​the number of bonds in the company's new project received upon expansion.

2. Which of the following is generally considered an advantage of term loans over publicly issued bonds?​

	a.	​Higher flotation costs
	b.	Speed, or how long it takes to bring the issue to the market​
	c.	​Fixed bond terms after the bond has been issued
	d.	​Regular interest and principal payments on specified dates
	e.	​Standard terms of issue requiring no negotiation between the borrowing firm and the financial institution

3. Which of the following statements is true about a zero coupon bond?

	a.	A zero coupon bond is taxed as a capital gain at the time the bond matures.​
	b.	​A zero coupon bond is issued at a substantial discount below its par value.
	c.	​A zero coupon bond is issued at a coupon rate that adjusts for inflation.
	d.	​The interest received every year on a zero coupon bond is taxed as interest income.
	e.	​The discount on the issue of a zero coupon bond is written off over its life in the investor's financial statement.

Answer 1

1. Answer is (c)

Conversion ratio is the number of shares of stock that the bond holder receives upon conversion.

This is usually calculated by

par value of bond ÷ conversion price

Example) jackey has a convertible bond of face value$ 100 with a convertible price of 20, so 100÷20= 5 shares.

He receives 5 shares by conversion therefore the answer.

2. Answer is (d)

Term loans are loans which have regular interest and principle payments over a period of time.

For all term loans it is pretty sure that interest will be available there fore term loans are less risky so returns will be also lesser. Interest rates will fluctuate according to market conditions but interest will be regular and principal amount will be also available at the time of maturity.

3. Answer is (b)

Basically the definition of the zero coupon bonds are bonds which are provided at high discounts from the par value however interest are not paid.

Therefore, it is a bond which is issued at substantial discount on its par value.