Which of the Following Statements Concerning Warrants Is Correct

question 7

Multiple Choice

Which of the following statements concerning warrants is correct?

• A) warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
• B) warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
• C) a firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
• D) a drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
• E) bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. however, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.

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Definitions:

Effective Interest Method

An accounting practice for amortizing the discount or premium on bonds payable or receivable, which reflects the actual interest rate the bond earns.

Bond Discount

The difference between the selling price of a bond and the bond’s face value when the bond is sold for less than par.

Coupon Rate

The rate of interest a bond pays annually, calculated as a percentage of its face value.

Call Feature

A provision in a bond agreement or other loan instrument that allows the issuer the option to repay the borrowed funds prior to the security's maturity date under specified conditions.