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Questions and Answers
What is the primary reason for a company to issue convertible bonds?
What is the primary reason for a company to issue convertible bonds?
- To provide investors with a higher return than a common stock.
- To avoid issuing new common stock.
- To raise capital at a lower interest rate than an ordinary bond. (correct)
- To increase the company's earnings per share.
What happens to the number of outstanding shares when a convertible bond is converted?
What happens to the number of outstanding shares when a convertible bond is converted?
- It decreases.
- It stays the same.
- It increases. (correct)
- It depends on the conversion price.
What is a key advantage of investing in convertible bonds?
What is a key advantage of investing in convertible bonds?
- Combination of fixed income and the potential for price appreciation. (correct)
- Higher interest rates than ordinary bonds.
- Guaranteed high returns.
- Lower risk than investing in common stock.
What is a potential disadvantage for investors in a convertible bond?
What is a potential disadvantage for investors in a convertible bond?
What is the conversion ratio for Coral Bhd's convertible bonds?
What is the conversion ratio for Coral Bhd's convertible bonds?
What is the conversion premium in percentage for Coral Bhd’s convertible bonds?
What is the conversion premium in percentage for Coral Bhd’s convertible bonds?
What is the earnings per share for Coral Bhd before issuing convertible bonds?
What is the earnings per share for Coral Bhd before issuing convertible bonds?
Assuming a 60% conversion of Coral Bhd's convertible bonds, what will be the new number of outstanding shares?
Assuming a 60% conversion of Coral Bhd's convertible bonds, what will be the new number of outstanding shares?
What is the conversion value of the convertible bonds issued by Coral Bhd?
What is the conversion value of the convertible bonds issued by Coral Bhd?
What will be the firm's operating profit after issuing the convertible bonds, considering a 20% increase?
What will be the firm's operating profit after issuing the convertible bonds, considering a 20% increase?
If Coral Bhd converts 60% of the convertible bonds, what will the interest expense be?
If Coral Bhd converts 60% of the convertible bonds, what will the interest expense be?
What is the effective tax payable after the conversion of the bonds if 60% of the bonds are converted?
What is the effective tax payable after the conversion of the bonds if 60% of the bonds are converted?
How many shares will be outstanding if Coral Bhd does not convert any of the convertible bonds?
How many shares will be outstanding if Coral Bhd does not convert any of the convertible bonds?
How much is the expected operating profit after issuing convertible bonds?
How much is the expected operating profit after issuing convertible bonds?
What is the conversion premium in percentage?
What is the conversion premium in percentage?
How much is the conversion premium in RM?
How much is the conversion premium in RM?
What is the total outstanding shares of Coral Bhd?
What is the total outstanding shares of Coral Bhd?
What will be the coupon payment for the RM100 million convertible bonds at a 6% rate?
What will be the coupon payment for the RM100 million convertible bonds at a 6% rate?
What is the current market price of Coral Bhd's shares?
What is the current market price of Coral Bhd's shares?
What is the tax rate applied to Coral Bhd's operating profit?
What is the tax rate applied to Coral Bhd's operating profit?
Flashcards
Conversion Ratio
Conversion Ratio
A measure of shares received for each bond, calculated as Par value/Conversion Price.
Conversion Value
Conversion Value
The monetary worth of a bond when converted into shares, calculated as Conversion Ratio × Market Price.
Conversion Premium %
Conversion Premium %
Percentage indicating excess of conversion price over market price, calculated as (Conversion Price - Market Price)/Market Price × 100.
Conversion Premium RM
Conversion Premium RM
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Market Price
Market Price
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Common Share
Common Share
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Operating Profit
Operating Profit
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Convertible Bonds
Convertible Bonds
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Earnings Per Share (EPS)
Earnings Per Share (EPS)
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Conversion Feature
Conversion Feature
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Advantages of Convertible Bonds
Advantages of Convertible Bonds
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Disadvantages of Convertible Bonds
Disadvantages of Convertible Bonds
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Tax Rate Impact
Tax Rate Impact
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Coupon Rate
Coupon Rate
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EBIT
EBIT
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Tax Rate
Tax Rate
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Study Notes
Convertible Bond Introduction
- A convertible bond (CB) is a bond that can be exchanged for a company's common shares.
- When a CB is converted, it increases the number of outstanding shares, impacting earnings per share (EPS).
Reasons for Issuing Convertible Bonds
- The conversion feature makes convertible bonds more attractive to investors, enhancing marketability.
- Holders can potentially become shareholders and potentially receive lower interest rates compared to ordinary bonds.
- Issuers can delay issuing new common stock until market prices increase, needing to issue fewer shares.
- Convertible bonds have fewer restrictive covenants than non-convertible bonds.
Advantages of Investing in Convertible Bonds
- Convertible bondholders receive income greater than dividends from common stock.
- Convertible bonds combine fixed income and potential price appreciation.
- Compared to common stockholders, convertible bondholders have yield advantages during stock price appreciation periods.
Disadvantages of Investing in Convertible Bonds
- Investors might lose potential profits if forced conversion occurs.
- Interest rates on convertible bonds may be lower than ordinary bonds.
- If the market stock price fails to exceed the conversion price, conversion may be unattractive.
Convertible Bond Features
- Conversion Ratio (CR): The number of shares an investor receives upon conversion.
- Conversion Price (CP): The price at which a bond can be converted into shares.
- Conversion Value (CV): The market value of the shares an investor would receive if the convertible bonds were converted.
- Par Value: The face value of the bond.
Convertible Bond Premium
- Conversion premium (in RM): The difference between the market price and conversion value (if the market price is above the conversion value).
- Conversion premium (in %): The percentage difference between the market price and conversion value (if the market price is above the conversion value).
Additional Convertible Bond Considerations
- Number of new shares issued: Calculated based on the total value of convertible bonds and conversion price.
- Earnings per Share (EPS): Calculated by dividing net income available for common stockholders by the number of outstanding shares.
Example Scenario (Coral Bhd)
- Coral Bhd issues RM100 million convertible bonds with a 6% coupon rate, 10-year maturity, and a conversion price of RM25 per share.
- Current market price of common stock is RM15 per share, and 10 million shares outstanding.
- Operating profit is RM20 million, expected to increase by 20% after issuing bonds.
- Tax rate is 30%.
- Calculate conversion ratio, conversion premium (percentage and RM), conversion value, and earnings per share (before financing, before conversion, after full conversion, and after 60% conversion).
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