4. Convertible bonds, warrants, and other exotic bond features Aa Aa As the name

Question

4. Convertible bonds, warrants, and other exotic bond features Aa Aa As the name suggests, convertible bonds allow the owner the option to convert the bonds into a fixed number of shares of common stock. Jorge bought APJ Inc.'s convertible bond at par ($1,000) with a yield of 3.25%. This bond had a conversion ratio of 25:1 at the price of $40 per his bond into shares? share. If AP] Inc.'s shares are currently trading at $48 per share, should Jorge convert Which of the following are most likely to have higher yields? O Nonconvertible hds Convertible bonds Consider the case of an investor, Nazim: Nazim wants to include putable bonds in his investment portfolio. Nazim is likely to put the bonds when: O He is in need of cash O He expects to use the cash when the bond matures Nazim also recently bought bonds with a clause stating that interest will be paid only when the company has enough earnings to pay for it. Nazim has invested in

Explanation / Answer

Let Face Value of the Bond is $10.

The Market Rate of Non- Convertible bond which are traded in the Market is $48 * 100 = $ 4,800

Fair Conversion Value of the Bond Is $40 * 104 = $4,160

If Bond is not converted then bonds gives $4,800 and if bonds are converted it gives $4,160.

So, it is adviced to Jorge to not convert any bonds into convertible bonds.

Convertible Bonds are most likely to have higher yields beacuse they have an option to converted into Non - Convertible Bonds in future.

Convertible bonds are the bonds that holders converts it into the Common stock or equity after a specified period. So, Convertible Bonds are most likely to have higher yields than Non - Convertible Bonds.

Puttable Bonds are those bonds which the Bond holders Gives or sell the company itself. The Bonds holder have an right to repayment of principal before the Maturity of Bonds are known as puttable Bonds.

Nazim wants to include puttable bonds in his investment portfolio. Nazim is likely put the bonds when he is need of cash.

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