Question

A common reason for issuing convertible bonds is

a)to give the purchaser the option of buying preferred shares.

b)to obtain debt financing at cheaper rates.

c)to avoid paying dividends on common shares

. d)to reduce the debt-to-total assets ratio.

The three types of market risk are

		currency, interest rate, and liquidity risks.
		interest rate, other price, and credit risks.
		currency, interest rate, and other price risks.
		liquidity, currency, and other price risks.

Answer 1

I) Common reason for issuing convertible bonds is to obtain debt financing at cheaper rates.

Convertible bonds are typically issued by companies that have high expectations for growth and less-than-stellar credit ratings. The companies get access to money for expansion at a lower cost than they would have to pay for conventional bonds. Investors, in turn, get the flexibility of turning their convertible bonds into cash or stock shares

A startup company with little current revenue and rapid growth potential might be an ideal candidate for issuing a convertible bond. A convertible bond is a hybrid security that has some features of both a bond and a stock share. It pays interest at a set rate at specified intervals. But, it can be converted to either cash or a specified number of common shares when it matures. The conversion option is available at pre-set times during the life of the bond.

Convertible bonds generally have a lower rate of return than conventional bonds. They appeal to investors who like the option of exploiting an increase in the stock's price or taking the cash, depending on which is the better deal when the bond matures.

Convertible bonds are an appealing option for corporations as well. They can set the rates of return a bit lower than conventional bonds. And, when the convertible bonds mature, some of them will be repaid in stock rather than cash.There's yet another bonus for the company: The interest on convertible bonds is tax-deductible.

If many or most of the convertible bond holders convert to stock shares, the company's shares in the market will be diluted. And that reduces the shareholders' equity value.

Note: -Tesla's Gigafactory was built with money raised in a convertible bond issue.

II) The three types of market risk are: -

-Currency: - If the currency value changes due to change in the demand supply of forex market then value of currency changes and impacts the revenue of the corporations. Exporters prefer fall in the value of the home currency so that when the sell home currency they receive more amount and importers prefer vice versa.

- Interest Rates: - Interest rates is everything in the economy. Nations are indepted to each other due to interest rates only. A cut in the interest rates impact the whole economy. A fall in interest rates decrease the worth of money. Say for an example you were getting 6% interest on your savings bank account and central bank cut the interest rate which means now you will get receive less interest on your savings bank account(in this case less than 6%).

- Liquidity Risks: - When the central banks figure out there is no liquidity in the economy, they play with macro factors like interest rates. When there is need of liquidity in the economy like in current times like Covid they will cut the interest rates so that cash inflow increases in the market. However, as discussed above it will reduce the existing money worth in the market, therefore, interest paid on anything will automatically reduce. And when there is overflow of liquidity in the market they reverse the above tactics. A smart businessman will take full advantage of cutting interest rates in the market by borrowing the money and expanding its business and buy all the necessary items for business under loans, because is selling at cheap interest rate now.