FIN. Ch. 15

Know the feautures of convertible bonds and convertible preffered stock. How is convertible preffered different from convertible bonds?

A convertible bond may be converted at the bondholder's option into a specified number of shares of common stock. Interest(coupon): why do convertible bonds tend to pay less interest than comparable non-convertible bonds? Maturity date Call feature: convertible bonds always have a call provision. Like all bonds, convertible bonds have an indenture. Conversions are one time, one way. Features associated with convertible bonds apply to convertible preferred stock EXCEPT: the instrument is equity, pays a fixed divident, lacks the safety associated with debt.

Define conversion ratio and conversion price.

Conversion ratio= number of common shares each bond could be exchange for Conversion price= the price paid for each share of common stock upon conversion

How does the value of convertible bonds( convertible preffered) respond to changes in interest rates and changes in price per share of common stock?

Convertible bond values rise whenever interest rate decreases (the value of the bond as debt increaes) Price per share of the stock increases (the value of the bond if converted to stock increases)

Recognize the four possible outcomes for a convertible bond.

Coversion Call Retirement at maturity Default

Describe the call feature. Does call become more/ less likely when interest rates increased/ decreased, when the price of common stock increase/ decreases?

Since the value of the convertible bond always exceeds the value as stock, the investor will always want to delay conversion. The issuing firm uses the call feature to force the bond holders to convert to stock. More, decreased, increase

Given the conversion ratio, the price per share of common stock, and the current market price ( or call price) of the convertible bond or convertible preffered, decided whether or not the investor should convert.

With the conversion ratio fixed, the value of convertible preferred, if converted to common stock, depends upon the price per share of the common stock.

What terminates the value of a convertible bond ( convertible preferred) if the conversation decision must be made immediately?

The value of the bond as debt and the value of the bond if converted to stock. Value of convertible increases as interest rates decline.