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Chapter 5: Q8DQ (page 622)

Explain how convertible bonds and warrants are similar and different.

Short Answer

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Answer

Convertible bonds convey the choice of conversion into common stock at a predefined cost during a specific period. Stock purchase warrants are given with bonds or preferred stock as a prompting to the investor, since they grant the acquisition of the organization's common stock at an expressed price .

Step by step solution

01

Introduction to convertible bonds-

Convertible bonds are corporate bonds that can be converted for common stock in the issuing organization. Organizations issue convertible bonds to bring down the coupon rate on debt and to postpone dilution.

02

Convertible bonds and warrants are similar and different-

Convertible bonds and convertible warrants are similar in that they give the security holder a future option on the common stock of the company.

Convertible bonds and warrants are dissimilar in a way that convertible bonds addresses a debt obligation of the firm. When convertible bonds is converted to common stock, corporate debt will be decreased and the capitalization will not increment of the company. A warrant is distinct as it is not a valuable instrument on its own advantages, and also the overall capitalization of the company will be increased if it is exercised.

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Most popular questions from this chapter

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

b. Calculate the present value of total inflows.

Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)

What is the purpose of market stabilization activities during the distribution process?

What was the purpose of the Sarbanes-Oxley Act of 2002?

Walton and Company is the managing investment banker for a major new underwriting. The price of the stock to the investment banker is \(23 per share. Other syndicate members may buy the stock for \)24.25. The price to the selected dealers group is \(24.80, with a price to brokers of \)25.20. Finally, the price to the public is $29.50.

  1. If Walton and Company sells its shares to the dealer group, what will the percentage return be?
  2. If Walton and Company performs the dealer’s function also and sells to brokers, what will the percentage return be?
  3. If Walton and Company fully integrates its operation and sells directly to the public, what will its percentage return be?
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