QUESTION 1:

Allianz is planning to issue a 12-year maturity bond with 30 warrants attached and a bond yield to maturity of 2.5%. Each warrant is expected to worth $3.

(a) If the coupon rate for this 12-year maturity bond is at 3%, how much capital would Allianz be able to raise for every bond with 20 warrants attached to each share of bond? (1 point)

(b) Suppose Allianz plans to sell each share of this 12-year bond with 30 warrants attached at par value ($1,000) today. What is the coupon rate for this Allianz bond? (1 points)

QUESTION 2:

Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year maturity, semi-annual annual coupon payments bond at $1,000 (par value). Each bond would have 45 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield to maturity is 10%. Each warrant is expected to have a market value of $3.75 given that the stock sells for $42. What annual coupon rate must the company set on the bonds in order to sell the bonds-with-warrants at par value?

QUESTION 3:

Orient Airlines common stock currently sells for $41, and its 6 years convertible bond with 9.5% annual coupon rate paid semi-annually has a yield to maturity of 9%. Each bond can be converted into 25 shares of common stock at any time before six years from now. Using calculations, show whether bondholders of this convertible bond more likely to convert the bond into common stock today or not? You need to provide calculations to support your answer.

QUESTION 4:

Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $400 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $400 and Johnson's stock price actually rises to $26, would you exercise your call option? And what would be your pre-tax net profit or loss from holding this call option?

QUESTION 5:

The current price of a stock is $30, and at the end of one year its price will be either $33 or $27. The annual risk-free rate is 3.0%, based on daily compounding. Based on the binominal option pricing model, what is the present value of a 1-year call option with an exercise price of $26?