PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 24, Problem 16PS
Convertible bonds True or false?
- a. Convertible bonds are usually senior claims on the firm.
- b. The higher the conversion ratio, the more valuable the convertible.
- c. The higher the conversion price, the more valuable the convertible.
- d. Convertible bonds do not share fully in the price of the common stock, but they provide some protection against a decline.
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Which of the following statements is CORRECT?
a. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
b. A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
c. Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
d. A company's subordinated debt has less default risk than its senior debt.
e. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
Which of the following statements about convertible bonds is correct?
Before conversion, convertible bonds are treated as equity because they can be potentially converted to equity shares.
Holders are more likely to convert bonds to equity shares if stock price declines significantly.
Upon conversion, a gain or loss will be recognized.
The company who sells convertible bonds will pay interest at a lower interest rate.
Some market participants say that convertible bonds are “debt when you want them to be equity, and equity when you want them to be debt”. Explain why this would be the case.
Chapter 24 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 24 - Bond terms Use Table 24.1 (but not the text) to...Ch. 24 - Bond terms Look at Table 24.1: a. The AMAT bond...Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Prob. 5PSCh. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Sinking funds For each of the following sinking...
Ch. 24 - Call provisions a. Look at Table 24.1. Suppose...Ch. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 14PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Convertible bonds Maple Aircraft has issued a 4%...Ch. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 19PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Prob. 22PSCh. 24 - Prob. 23PSCh. 24 - Bank loans, commercial paper, and medium-term...Ch. 24 - Prob. 25PSCh. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 28PS
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- When computing diluted earnings per share (EPS), convertible bonds are:A. ignored.B. assumed converted whether they are dilutive or antidilutive.C. assumed converted only if they are antidilutive.D. assumed converted only if they are dilutive.arrow_forwardBeacuase the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mean that a company can lower its cost of borrowingby selling convertible debt? explainarrow_forwardConvertible securities can usually be sold with interest rates ____ other nonconvertible securities a. equal to b. with no relation to c. lower than d. higher thanarrow_forward
- If bonds payable are not callable, the issuing corporation a.can exchange them for common stock b.can repurchase them in the open market c.is more likely to repurchase them if the interest rates increase d.must get special permission from the SEC to repurchase themarrow_forwardWhen dilutive convertible bonds are the only potential ordinary shares, the diluted earnings per share (EPS) will be __________if the bonds are actually converted compared to when they are not converted.A. lowerB. higherC. the sameD. incomparablearrow_forwardConvertible bonds a. Provide potential benefits only to the issuer.b. Provide potential benefits only to the investor.c. Provide potential benefits to both the issuer and the investor.d. Provide no potential benefits.arrow_forward
- A convertible security (usually convertible bonds or convertible preferred stock) may be tendered at the option of the holder for shares of common stock in the issuing firm. In other words, the bonds or preferred stock may be converted to common stock. Like warrants, convertibles can lead to diluted earnings, because new shares of common stock are issued. However, unlike warrants, convertibles: A. result in new capital for the firm. B. do not result in new capital for the firm. Consider the case of Cheung Zap Inc.: Cheung Zap Inc. just issued 17-year convertible bonds at a par value of $ 1,000. At any time before maturity, investors have the option to exchange their bonds for shares of Cheung's common stock at a conversion price of $60.48. Cheung's convertible bonds pay a 7.56% annual coupon, but if Cheung had issued straight - debt bonds (no conversion), it would have had to pay 12.60% annual interest. Based on the information available, complete the table: Value Conversion ratio of…arrow_forwardWhen dilutive convertible bonds are the only potential ordinary shares, the diluted EPS will be __________if the bonds are actually converted compared to when they are not converted. A. lower B. higher C. the same D. incomparablearrow_forwardWhich ot the following features would decrease the value of a corporate bond? A.The bond is sinior debt obligation B.The bond is convertible into shares C.The bond is secured by a mortgage on real estate D.The borrower has the option to repay the loan before maturityarrow_forward
- When computing diluted EPS, convertible bonds are A. ignored.B. assumed converted whether they are dilutive or antidilutive.C. assumed converted only if they are antidilutive.D. assumed converted only if they are dilutive.arrow_forwardDisadvantages of selling a combination of stocks and bonds?arrow_forwardWhy do companies find the issurance of convertible bonds to be an attractive form of financing?arrow_forward
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