Convertible debt and straight debt issued with warrants are similar securities, because both are debt securities that represent potential equity claimson the issuer's assets. In fact, convertible debt can be thought of as straight debt plus nondetachable warrants. However, several importantdistinctions do exist. Use the following table to indicate whether the characteristic listed refers to convertible bonds or to debt with warrants:CharacteristicWhen exercised, the issuing firm receives new equity capital.When exercised, new claims on shareholders' equity are created, but no capital is transferred.These securities tend to have higher flotation costs.Convertible Bonds Debt with WarrantsIf a firm experiences rapid growth subsequent to convertible or bond-with-warrant issues, does that make it more or less likely that the securities willbe converted or exercised?Less likely to be converted or exercisedO More likely tobe converted or exercised

With convertible debt, a company borrows money from a lender or investor with the understanding that…

Answered: Convertible debt and straight debt…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter7: Financial Activities

Section: Chapter Questions

Problem 3BIC

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Both convertible bonds and bonds issued with detachable warrants have features of both debt and equity. How does the accounting treatment differ for the two hybrid securities? Why is the accounting treatment different?
Which of the following is correct? A. Bonds maturing at a specified single date are called ordinary bonds. B. Equity securities and debt securities differ only in their effect on a company’s cash flow. C. One purpose in holding bonds as a long-term investment is to provide the investor a voting voice in the management of the issuing company. C. On bonds, the yield rate and the nominal rate of interest are always different.
With regard to the measurement of a convertible bond issue, which of the following statements is correct?a. IFRS requires the use of the relative fair value method for the bond and the convertible feature b. IFS requires all proceeds be recorded as debt. c. ASPE would not allow the entire proceeds to be credited to bonds payable d. ASPE provides that the amount paid in associated with the conversion feature be either valued at zero or at the differencebetween the amount paid in and the fair value of the bond only as contributed surplus. e. None of the above.
Which of the following statements is correct?(a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.(b) Both IFRS and GAAP assume that when there is choice of settlement of an option for cash or shares, share settlement is assumed.(c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.(d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.
Which of the following statements is correct? a. IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component. b. Both IFRS and GAAP assume that when there is choice of settlement of an option for cash or shares, share settlement is assumed. c. IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values. d. Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity. 3. Under IFRS, convertible bonds:
Which of the following statements about convertible bonds is correct? Before conversion, convertible bonds are treated as equity because they can be potentially converted to equity shares. Holders are more likely to convert bonds to equity shares if stock price declines significantly. Upon conversion, a gain or loss will be recognized. The company who sells convertible bonds will pay interest at a lower interest rate.
To be effective issuing and investing in bonds, knowledge of their terminology, characteristics, and features is essential. For example: • A bond’s refers to the interest payment or payments paid by a bond. • A bond issuer is said to be in if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue’s restrictive covenants. • The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called . • A bond’s gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions. Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information: Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the issuing date of this bond? 7-15-2005 7-15-2055…
Which of the following statements concerning warrants is CORRECT? JUST EXPLAIN ONE ANSWER WHICH IS INCORRECT. Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants were used but remains the same if it used convertibles. Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen. A firm’s investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
Discuss the similarities and the differences between convertibledebt and debt issued with stock warrants.
Some market participants say that convertible bonds are “debt when you want them to be equity, and equity when you want them to be debt”. Explain why this would be the case.
______________ allows the investor to transform debt into equity under certain circumstances. a. Equity shares b. Non-convertible bonds c. Equity debentures d. Convertible bond
Which of the following is incorrect regarding a compound financial instrument? a.)None of the other choices is incorrect. b.)Convertible bonds and bonds with share warrants are examples of compound financial instruments. c.)It is a financial instrument that from the debtor’s perspective, contains both a liability and an equity element. d.)The buyer accounts for the elements of a compound financial instrument separately.

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