1.The differences in accounting for proceeds from the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock. Convertible debts are long-term securities which can be converted into issuer 's stock options at a specified conversion ratio, if the debt-holder wants to exercise them. Convertibles include
Moderate risk. Purchasing a bond means giving a loan to a company. “T-Bonds” are bonds issued by the U.S. Treasury and are safer than corporate bonds. (Loaning money to the government is safer than loaning money to a private business.)
For the instructor, this was question 7. An investment in a tax-exempt (municipal) bond with an interest rate of 8 percent is preferable to an investment in a taxable (corporate) bond with an interest rate of 10 percent.
There are three main reasons why a corporation may be interested in calling a bond.
EBMA Level 8 Diploma in strategic Business Research and Leadership Direction Unit Title: Strategic Financial Analysis and Planning Table of Contents Executive Summary 3 1.Critique and evaluate research ....... 4 2.Critically apply modern financial tools 6 3.Use main types of investment appraisal tools 8 4.Critically evaluate the importance of research 10 References 11 Executive Summary The decision making of management is
The bonds can be issues with fixed interest or variable rate interest, each of which has its advantages and there disadvantages.
State of Connecticut Municipal Swap Case Study: An Analysis and Recommendation of Synthetic Fixed Rate Derivatives Dear Mr. Benson R. Cohn, We, the State of Connecticut, have typically financed the long-term capital needs of the State through tax-deductible General Obligation bonds. This allowed us to achieve a lower costof-debt than similar taxable bonds. In stark contrast to the fixed-rate long-term debt financing, short term municipal financing for our State was often achieved through innovative methods developed by Wall Street. These new funding options, commonly referred to as Variable-Rate Demand Obligations (“VRDO’s”),
| |One reason corporations sell corporate bonds is to help finance their ongoing business activities. |
When the contractual interest rate and the market interest rate are the same, the bonds are sold at face value. But when the contractual interest rate and the market interest rates differ then the bonds are usually sold below or above face value. If the market rate of interest is lower than the contractual interest rate then the investors will have to pay more than the face value for the bonds (premium). When a company issues 12% bonds at a time when other bonds of similar risk are paying 15%. Most investors will be more interested in buying the 12% bonds and their value will fall below their face value, which is called selling at a discount.
a. Bond’s with collateral will have lower coupon rate as bondholders have claim on collateral no matter what. It provides an asset which lowers default risk. Downside to company is that this collateral cannot be sold as an asset and needs to maintain it.
Required debt rate and pro forma income statement Risk determinants Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond
a. Why do the bonds’ coupon rates vary so widely? It is because TECO sells bonds at par and sets the coupon rates at the market rate of interest when the bonds are issued, interest rates have risen over the last 25 years, and that explains the rising pattern of coupon rates.
The advantage to choosing a convertible bond for financing is that "they provide issuers with cheap' debt and allow them to sell equity at a premium over current value". Jen, Choi, Lee (1997).
It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.
Different types of bonds Along with the many different characteristics of bonds such as, the way the pay their interest, the market they are issued in, the currency they are payable in, protective features and their legal status. Bond issuers may be governments, corporations, special purpose trusts or even non-profit organizations. Usually it is the type of issuer or the particular nature of a bond that sets it apart in its own category.