The best answer is A.
If the bonds are tendered at the call price, the owner receives $1,050 per bond.
If the bonds are sold at the current market price of 104, the owner receives $1,040 per bond.
Converting the bonds into common means that the bonds must be tendered to the transfer agent, who will cancel the bonds and issue 20 shares of stock for each bond tendered. Since each share is now worth $52, this would yield 20 x $52 = $1,040 if those shares are sold right now. The only problem with this is it takes about 30 days for the transfer agent to do this, so the shares cannot be sold "right now." In 30 days, who knows where the share price will be? (Note that if the question gave the answer that the customer should short the stock at $52, tender the bonds, and then when the shares arrive, deliver them to cover the short position, the customer would earn the same $1,040 per bond as in Choice B.)
Continuing to hold the bonds does not make sense since interest payments will cease.
Also note that the amount of accrued interest to be received is irrelevant to the question. Since the customer already holds the bond, the customer is entitled to the amount of accrued interest due up until the call date, regardless of whether he or she sells the bond or converts!
The best answer is D.
Reverse convertible notes were created for customers looking for enhanced yield in a low interest rate environment. Of course, any enhanced yield comes with higher risk. The note is linked to the price movements of an underlying stock (or very rarely, an underlying index). At maturity, the holder will receive par value, as long as the price of the reference stock is above the "knock-in" price (typically 70-80% of the initial reference price). On the other hand, if at maturity, the reference stock falls below the "knock-in" price, then the holder will receive the shares of stock. Thus, if the market price of the reference stock declines below the "knock-in" price, the customer receives the stock at maturity and not par value.
A reverse convertible note is a structured product that is an obligation of the issuing bank - not the corporation or the corporate securities on which the product is based. As such, the note only as good as the credit of the issuing bank. Furthermore, if the market price of the stock declines to, or through, the "knock-in" price, the customer receives stock at maturity and that stock could potentially be worthless. The customer should be made aware of all of these points.
The best answer is B.
Accrued interest for corporate bonds is calculated on a 30 day month / 360 day year. Interest accrues from the morning of the last interest payment up to, but not including, settlement date. This trade settles on Tuesday the 25th. So, there are 30 days due for March, 30 days due for April, 30 days due for May, 30 days due for June, 30 days due for July, and, finally, 24 days due for August (up to but not including the settlement date of August 25th). The total is 174 days.
A municipality has floated a $70,000,000 revenue bond issue. The annual level debt service requirement is $7,000,000. In the first fiscal year, the municipality has collected revenues of $14,000,000. The "Coverage Ratio" is:
A. $70,000,000 / $14,000,000
B. $14,000,000 / $7,000,000
C. $70,000,000 / $7,000,000
D. $7,000,000 / $14,000,000