GEN CMB LL CORP FINC; CNCT
11th Edition
ISBN: 9781259724145
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 24, Problem 6CQ
Warrants and Convertibles What is wrong with the simple view that it is cheaper to issue a bond with a warrant or a convertible feature because the required coupon is lower?
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Students have asked these similar questions
Beacuase the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mean that a company can lower its cost of borrowingby selling convertible debt? explain
Why are convertibles and bonds with warrants typically offered with lower coupons thansimilarly rated straight bonds?
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.
Chapter 24 Solutions
GEN CMB LL CORP FINC; CNCT
Ch. 24 - Prob. 1CQCh. 24 - Prob. 2CQCh. 24 - Convertible Bonds and Stock Volatility Suppose you...Ch. 24 - Convertible Bond Value What happens to the price...Ch. 24 - Prob. 5CQCh. 24 - Warrants and Convertibles What is wrong with the...Ch. 24 - Warrants and Convertibles Why do firms issue...Ch. 24 - Convertible Bonds Why will convertible bonds not...Ch. 24 - Convertible Bonds When should a firm force...Ch. 24 - Conversion Price A convertible bond with a par...
Ch. 24 - Conversion Ratio A convertible bond with a par...Ch. 24 - Conversion Premium Eckely, Inc., recently issued...Ch. 24 - Convertible Bonds Hannon Home Products, Inc.,...Ch. 24 - Prob. 5QPCh. 24 - Convertible Bond Value An analyst has recently...Ch. 24 - Convertible Bond Value Sportime Fitness Center,...Ch. 24 - Convertible Bonds You own a callable, convertible...Ch. 24 - Prob. 9QPCh. 24 - Convertible Bonds Vital Silence Corp. bas just...Ch. 24 - Convertible Bonds Rob Stevens is the chief...Ch. 24 - Prob. 12QPCh. 24 - Prob. 13QPCh. 24 - Prob. 14QPCh. 24 - Warrant Value Superior Clamps, Inc., has a capital...Ch. 24 - Prob. 16QPCh. 24 - SS AIR'S CONVERTIBLE BOND Chris Guthrie was...Ch. 24 - What is the floor value of the SS Air convertible...Ch. 24 - What is the conversion ratio of the bond?Ch. 24 - What is the conversion premium of the bond?Ch. 24 - What is the value of the option?Ch. 24 - Is there anything wrong with Todds argument that...Ch. 24 - Is there anything wrong with Marks argument that a...Ch. 24 - Prob. 8MCCh. 24 - During the debate, a question comes up concerning...
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- Why think that convertibles are riskier than straight bonds?arrow_forwardWhich statement is not correct? A convertible bond is like a bond with a call option. The amount of DPS has negative impact on favorable income differential per share of a convertible bond. The value of a convertible bond cannot be less than its straight value. Exchangeable bonds give the bondholder the right to exchange the bonds for the common stock of the issuer of the bond. The conversion value of a convertible bond is directly related to its market price of common stock.arrow_forwardSome 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.arrow_forward
- You just purchased a convertible bond. Today, the strictly debt value is inferior relative to the conversion value. If the required return on the bond increases: a) The minimum price of the bond will decrease. b) The minimum price of the bond will increase. c) The minimum price of the bond remains the same. d) The strictly debt value of the bond will be superior to the conversion value. e) It is impossible to make that determination with this information.arrow_forwardDiscuss the functioning and merits of callable and puttable bonds from an investor’s perspective. Discuss how the price of a puttable bond will differ from the price of a similar, plain vanilla bond and the main determinants of this price difference. In which market environment does the issuance of a callable bond make more sense from a corporate issuer’s perspective?arrow_forwardInstructions: Choose the right answer w/ explanation. [3]. Which of the following will yield to lower coupon rates? A bond has a call option A bond has a put option A bond is not convertible A bond is subordinatedarrow_forward
- explain how fluctuating market interest rates impact the price of a bond being sold on the secondary market. Why would a bond be selling at a premium or a discount?arrow_forwardWhat are convertibles are riskier than straight bonds?arrow_forward1. A debenture is: Group of answer choices a secured bond a callable bond an unsecured bond a redeemable bond 2. A convertible bond Group of answer choices comes with a retractable top can be called in for early retirement can be turned in by the investor for early retirement can be swapped for other securities of the issue, typically stock 3. The coupon interest rate: Group of answer choices is the same as the effective interest rate is the same as the market interest rate is smaller than the stated interest rate. is the same as the stated interest rate 4. A bond has a face value of $10,000,000. It has a stated interest rate of 5% and a market interest rate of 6%. It sold for $900,000. It pays interest once a year on December 31. How much interest will the company pay each year? Group of answer choices $500,000 $450,000 $600,000 $540,000 5. A bond has a stated interest rate of 13% and a market…arrow_forward
- What are the pros and cons of convertible bonds to a bond investor? Under what conditions would you favor buying convertibles over straight bonds? Why might you favor buying straight bonds over convertibles?arrow_forwardCan I use the yield to maturity (YTM) on a bond issued by the company as the cost of debt? A Yes, you can use the YTM B No, you cannot use the YTM C Only if the bond is liquid and has not special feature embedded in it D There is not enough information to answer this problemarrow_forwardA disadvantage to the investor of a convertible bond is that A. all of these options are disadvantages. B. the stock price may never rise above the conversion price. C. if interest rates rise, the pure bond value (floor price) will decline. D. the interest rate on convertibles is generally one-third below the coupon rate on straight bonds of similar risk.arrow_forward
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