Convertible bonds, Financial Management

Assignment Help:

Convertible bonds are the debt instruments issued which can be converted after a pre-specified date for a pre-specified number of securities (generally equity stock). It is necessary that all other relevant inform about the conversion of the bonds should be clearly given in the offer document of the convertible bond.

Investor has the choice to convert or not convert the bonds into stocks. If he chooses not to convert the bonds into stock then he will keep receiving interest payments from the company. In the other case, he will get a specific number of equity shares of the company. Since the investor is getting the conversion privilege, he/she will accept a lower coupon rate for a convertible bond compared with an otherwise identical non-convertible bond (i.e., a non-convertible bond with same credit rating, the same term to maturity, etc.). Thus, we can conclude that convertible bonds may have a lower cost of capital in comparison to non-convertible bonds with same caracteristics. It may be possible that when conversion of bonds becomes due the conversion price is lower than the market price of the share. In such a scenario the company will loose what it earned because of lower cost of capital. Therefore, it is very necessary that the company should set the conversion price very carefully.


Related Discussions:- Convertible bonds

Bse-500 and sectoral indices, BSE-500 and Sectoral Indices On August 9,...

BSE-500 and Sectoral Indices On August 9, 1999, another new index was introduced in the market which was based on the data of 500 companies and designated as BSE-500 index. It

Traditional capital budgeting techniques, Traditional   Capital Budgeting ...

Traditional   Capital Budgeting Techniques These techniques are usually very simple and easily catchable. But the fundamental drawback of these methods is that they don't cons

Computation of the cost of capital, Q. Computation of the cost of capital? ...

Q. Computation of the cost of capital? Computation of overall cost of capital of the firm invoices Cost of debts: debt may be issued at par , at premium or discount it may

Inverse floaters, Normally, floater coupon rate moves in the same dir...

Normally, floater coupon rate moves in the same direction as the reference rate. That is, with an increase in the reference rate, the floater coupon rate also increases

Determining the value at a node or backward induction, The value of node is...

The value of node is determined using a methodology called backward induction. The value at any node depends on the future cash flows; therefore, we need to start from

Define accounting and financial terms, What do you understand by financial ...

What do you understand by financial viability of the organization? 2 : Define Following accounting and financial terms: Asset Liability Equity Income Expense

Electronic communications networks, Electronic Communications Networks: ...

Electronic Communications Networks: In traditional stock exchanges, the buying and selling of stocks take place at a physical location only and the members have to conduct tradi

What is the optimal amount of risky assets, Consider a world with two asset...

Consider a world with two assets: a riskless asset paying a zero interest rate, and a risky asset whose return r can take values +10% or -8% with equal probability. An individual h

Beta, Beta Beta is a measure of the market risk, or methodical risk, o...

Beta Beta is a measure of the market risk, or methodical risk, of a particular privacy or portfolio. Systematic risk defines any risk that influences the value of a huge numbe

Define the implications of the interest rate parity, Discuss the implicatio...

Discuss the implications of the interest rate parity for the exchange rate determination. Answer: Presume that the forward exchange rate is roughly an unbiased predictor of the

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd