Question
In: Finance
a. Discuss the benefit(s) of issuing convertible bonds. b. Consider a corporate bond with an embedded...
a. Discuss the benefit(s) of issuing convertible bonds.
b. Consider a corporate bond with an embedded conversion
option. If both the share prices of the company and interest rates
are falling, would it be a good or bad idea to exercise the
conversion option? Discuss the reason(s).
Solutions
Expert Solution
A. Benefits of issuing convertible bonds are as follows-
a. These bonds have a convertible feature, so there is a possibility of being converted into the share
b.they would be having a low rate of interest because they have the conversion feature embedded into them
c. They will provide flexibility to the company as well.
1.b. if share prices of the company and the interest rate are falling it would be better to to stay with the bond because at least as Bond will have a fixed amount of payments and it will not be getting affected by the fall in the interest rates as I am assuming it as a fixed rate Bond soo when the share prices will fall it will also mean that the value of the conversion option will be going down.
so there should be sceptical decision making on the part of the investor and If he's trying to invest for the longer period of time he would be trying to encash those bonds into shares.
jeff jeffy answered 1 year agoRelated Solutions
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