If the stock price has decreased since the bond's issue date, the investor can hold the bond until maturity and get paid the face value. If the stock price increases significantly, the investor can convert the bond to stock and either hold or sell the stock at their discretion.
Full Answer
Do convertible bonds decrease in value?
True 3) Convertible bonds decrease in value whenever the price of the company's stock increases. false 4) Junk bonds are also called high-yield bonds. true 5) The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds. true
How does stock price affect a convertible?
Notice the price of the bond begins to rise as the stock price approaches the conversion price. At this point, your convertible performs similarly to a stock option. As the stock price moves up or becomes extremely volatile, so does your bond.
How is the conversion price set for convertible securities?
The conversion price is set when the conversion ratio is decided for a convertible security . The conversion price and ratio can be found in the bond indenture (in the case of convertible bonds) or in the security prospectus (in the case of convertible preferred shares).
What is a convertible bond conversion ratio?
Convertible bonds are a flexible financing option for companies. A convertible bond offers investors a type of hybrid security, which has features of a bond such as interest payments while also providing the opportunity of owning the stock. This bond's conversion ratio determines how many shares of stock you can get from converting one bond.
What is a convertible bond quizlet?
A convertible bond allows the investors (lender) to exchange the bond for something else within a given time under any conditions specified in the bond indenture.
What are convertible bonds?
What Is a Convertible Bond?A convertible bond pays fixed-income interest payments, but can be converted into a predetermined number of common stock shares.The conversion from the bond to stock happens at specific times during the bond's life and is usually at the discretion of the bondholder.More items...
Which of the following will cause the value of a bond to increase other things held the same quizlet?
Which of the following will cause the market value of a bond to increase, other things held the same? Interest rates decrease.
What do convertible bonds lack?
Generally, convertible bonds lack a call provision. Convertible bonds are often subordinated to the firm's other debt. convertible bond falls. A convertible bond's value fluctuates with the price of the stock into which the bond may be converted.
How does convertible debt affect stock price?
Most issuers hope that if the price of their stocks rises, the bonds will be converted to common stock at a price that is higher than the current common stock price. By this logic, the convertible bond allows the issuer to sell common stock indirectly at a price higher than the current price.
How do you price a convertible bond?
To accomplish convertible bond valuations, investors may rely on the following formula: Value of convertible bond = independent value of straight bond + independent value of conversion option.
Which of the following will cause the value of a bond to increase?
interest rates decrease . The value of a bond increases if it's paying more than the market.
Which of the following is true concerning the interest rate risk of bonds?
Which of the following is true concerning the interest rate risk of bonds? Bond prices move inversely to changes in interest rates.
Which of the following would increase a company's need for external finance all else equal?
Which of the following would increase a company's need for external finance, all else equal? an increase in the dividend payout ratio.
What happens to the price of a convertible bond if interest rates increase?
There are certain risks associated with an investment in a convertible bond such as default risk—that the company issuing a convertible security may be unable to repay principal and interest—and interest rate risk—that the convertible may decrease in value if interest rates increase.
What are the advantages of convertible bonds?
Convertible bonds typically carry lower interest rates payments than straight corporate bonds—the savings in interest expense can be significant. Investors accept the lower interest payments because the conversion option offers the opportunity to benefit from increases in the stock price.
Why do companies use convertible bonds?
Convertible bonds are typically issued by companies that have high expectations for growth and less-than-stellar credit ratings. The companies get access to money for expansion at a lower cost than they would have to pay for conventional bonds.
Why would a company issue a convertible bond?
Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond's conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.
What is the difference between a straight bond and convertible bond?
Convertible bonds typically carry lower interest rates payments than straight corporate bonds—the savings in interest expense can be significant. Investors accept the lower interest payments because the conversion option offers the opportunity to benefit from increases in the stock price.
Are convertible bonds a good investment now?
Convertible securities are somewhat complex instruments that are unfamiliar to most investors. Now could be a good time to learn about them. Converts are bond/stock hybrids that can offer the security of bonds and the upside of stocks. They've historically generated strong returns—gaining about 50% in 2020.
Are convertible bond funds a good investment?
Looking at how U.S.-focused convertible debt funds stack up against U.S. large-cap stocks, he said convertible bonds have done comparatively well in terms of returns performance “while exhibiting lower volatility and crash risk.”
Why Do Companies Issue Convertible Bonds?
Companies issue convertible bonds or debentures for two main reasons. The first is to lower the coupon rate on debt. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature. This enables the issuer to save on interest expenses, which can be substantial in the case of a large bond issue.
Why do companies offer lower yields on convertible bonds?
Because convertibles can be changed into stock and, thus, benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. If the stock performs poorly, there is no conversion and an investor is stuck with the bond's sub-par return—below what a non-convertible corporate bond would get.
How does a convertible bond perform?
The chart below shows the performance of a convertible bond as the stock price rises. Notice the price of the bond begins to rise as the stock price approaches the conversion price. At this point, your convertible performs similarly to a stock option. As the stock price moves up or becomes extremely volatile, so does your bond.
What is convertible bond?
Convertible bonds are corporate bonds that can be exchanged for common stock in the issuing company. Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond's conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher ...
Why are convertible bonds better than non-convertible bonds?
Because convertibles can be changed into stock and, thus, benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. If the stock performs poorly, there is no conversion and an investor is stuck with the bond's sub-par return—below what a non-convertible corporate bond would get. As always, there is a tradeoff between risk and return.
What is the downside of convertible bonds?
One downside of convertible bonds is that the issuing company has the right to call the bonds. In other words, the company has the right to forcibly convert them. Forced conversion usually occurs when the price of the stock is higher than the amount it would be if the bond were redeemed.
Why do people invest in convertible bonds?
At their most basic, convertibles provide a sort of security blanket for investors wishing to participate in the growth of a particular company they're unsure of, and by investing in convertibles, you are limiting your downside risk at the expense of limiting your upside potential.
When do convertible bonds decrease in value?
Convertible bonds decrease in value whenever the price of the company's stock increases.
What happens when interest rates decrease?
a decrease in interest rates decreases bond prices.
Why add stocks to a bond portfolio?
Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have a higher standard deviation of returns than bonds. Proper diversification generally results in the elimination of portfolio risk. A stock with a beta of 1.4 has 40% more variability in returns than the average stock.
What is the purpose of cash flow?
to bring the future benefits and costs of a project, measured by its cash flows, back to the present.
Why can't we find the value of an annuity?
Because we don't know the interest rate, we can't find the value of the annuities.
Does price sensitivity decrease with maturity?
price sensitivity to interest rate changes decreases with maturity.
Is compound yield to maturity larger than expected?
the actual compound yield to maturity will be larger than the expected yield.
When do convertible bonds decrease in value?
3) Convertible bonds decrease in value whenever the price of the company's stock increases.
Who has the right to sell bonds back to the issuer?
A) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well.
Why are subordinated debentures more risky than unsubordinated debentures?
1) Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.
How to find the par value of a corporate bond?
true. To determine the periodic interest payments that a bond makes, multiply the bond's stated coupon rate by its par value and divide by the number of coupon payments per year. true.
What is a bond?
9) A bond is a long-term promissory note issued by the firm.
What is a bond issued in a country different from the one in which the currency of the bond is denom?
6) Bonds issued in a country different from the one in which the currency of the bond is denominated are called Eurobonds.
Which corporation issued callable bonds?
11) Progressive Corporation issued callable bonds. The bonds are most likely to be called if