Convertible Bonds

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Newcastle Business School Sample Report Sample Report The following report demonstrates the basic format of a report, as outlined in the report section of the Student Manual. Formats may vary slightly from subject to subject, but the fundamental principles are the same. Always check with your lecturer about specific formatting. It is expected that you will attached an assignment cover sheet to each assignment you submit. Page 2 Table of Contents EXECUTIVE SUMMARY 1. INTRODUCTION 2. NATURE OF CONVERTIBLE BONDS 3. FINANCIAL ADVANTAGES AND DISADVANTAGES 3.1 3.2 ADVANTAGES DISADVANTAGES ii 1 1 2 2 2 3 5 5 6 7 4. ACCOUNTING TREATMENT 5. LOGIC OF THE ACCOUNTING REQUIREMENTS 6. CONCLUSION 7. RECOMMENDATIONS REFERENCES…show more content…
31). If a conversion ratio, rather than a conversion price, is specified, the effective price of stock to the bondholder may be determined by dividing the par value of the bond by the number of shares exchangeable for one bond. The conversion price, which is determined when the bonds are 30%, is usually from 10 to 20 percent above the prevailing market price of the common stock at the time of issue. Both the issuing form and the investor expect that the market price of the stock will rise above the conversion price, and that the conversion privilege will then be exercised by most or all bondholders. The indenture typically includes a call provision so that the issuing firm can force bondholders to convert. Therefore, it is evident that firms issuing convertible debt (1) Page 5 often truly want to raise equity capital. The reasons that they choose convertible debt are discussed below. 3. Financial Advantages and Disadvantages 3.1 Advantages The use of convertible debt would offer Hamilton advantages over straight debt or stock issues. Bonds that are convertible into stock are in demand. Therefore, bond buyers are willing to accept a low stated interest rate on such bonds, to pay a premium and accept a lower yield, or to accept less restrictive covenants. Hamilton could thus obtain funds at a lower cost than would be possible if it issued bonds without the conversion privilege. The advantages of a convertible bond issue over a
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