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 ago
Next > < Previous

Related Solutions

A common reason for issuing convertible bonds is a)to give the purchaser the option of buying...
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.
Describe the market for bonds and discuss the difference(s) between government and corporate bonds.
Describe the market for bonds and discuss the difference(s) between government and corporate bonds.
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price...
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price of the (embedded) warrants. If it increases the exercise price, will the cost of debt go up or down? Explain the effect step by step, thus what happens to the Time Value Premium if it increases the exercise price, then explain the impact of the Time Value Premium on…, etc.
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price...
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price of the (embedded) warrants. If it increases the exercise price, will the cost of debt go up or down? Explain the effect step by step, thus what happens to the Time Value Premium if it increases the exercise price, then explain the impact of the Time Value Premium on…, etc.
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price...
When issuing convertible bonds or bonds with warrants attached, the company can change the exercise price of the (embedded) warrants. If it increases the exercise price, will the cost of debt go up or down? Explain the effect step by step, thus what happens to the Time Value Premium if it increases the exercise price, then explain the impact of the Time Value Premium on…, etc.
Convertible Bond Analysis Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds...
Convertible Bond Analysis Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $64.15, and the common stock price was $58 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.85% at the time Roop's bonds were issued....
Convertible Bond Analysis Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds...
Convertible Bond Analysis Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $61.20, and the common stock price was $54 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.30% at the time Roop's bonds were issued....
Suppose you are an investor in bonds. Consider a corporate bond with a $100 par value,...
Suppose you are an investor in bonds. Consider a corporate bond with a $100 par value, a 5% coupon paid semi-annual coupon, and five years to maturity. The bond presently yields 3% annually. Suppose that interest rates rise shortly, and the yield on comparable bonds is now 4%. After observing this change, you call your broker Jane for a quote on the bond. Jane shows that the bond price is $105. You quickly realize that there is an arbitrage opportunity...
1. A convertible bond allows the investor to exchange that bond for another issue of bonds...
1. A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period. Select one: True False 2. Bonds are issued with a callable feature when the issuers expect interest rates to rise. Select one: True False 3. Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature. Select one: True false 4. Common stockholders have the right to vote...
Issuance of Convertible Bonds Joy Insurance decides to finance expansion of its physical facilities by issuing...
Issuance of Convertible Bonds Joy Insurance decides to finance expansion of its physical facilities by issuing convertible debenture bonds. The terms of the bonds follow: maturity date 10 years after May 1, 20Y1, the date of issuance; conversion at option of holder after two years; 20 shares of $1 par value stock for each $1,000 bond held; interest rate of 12% and call provision on the bonds of 102. The bonds were sold at 101. 1. Give the entry on...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT