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

Question

4. Convertible bonds, warrants, and other exotic bond features Aa Aa E 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 share. If AP] Inc.'s shares are currently trading at $55 per share, should Jorge convert his bond into shares? Which of the following best describes the difference between a convertible bond and a warrant? Convertible bonds give the investor the option to buy shares at a certain price, whereas warrants give the investor the option to exchange bonds for shares at a certain price. O Convertible bonds give the investor the option to exchange bonds for shares at a certain price, whereas warrants give the investor the option to buy shares at a certain price. 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

a. If Jorge converts now the value will be = 25 * 55 = 1375 as the Share value is more than the bond value jorge can convert now.

b. Option B. convertible bonds give the investors the option to exchange bonds for shares at a certain price whereas warrants give the investor the option to buy shares at a certain price

c. Option B He expects to use cash when the bond matures.

D. inflation linked bonds.Nazim invested in These bonds

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