Föreläsning 13

Question 1

What is a callable bond?

Answer 1

Bond with a call provision that allows issuer to repurchase bonds at a predetermined price prior to maturity

Question 2

What is a convertible bond?

Answer 2

Bond with a provision that gives bondholder option to convert each bond owned into a fixed number of shares of common stock

Question 3

What is a call provision?

Answer 3

Gives issuer of bond the right (but not the obligation) to retire all
outstanding bonds on (or after) a specific date (the call date), for the call price.

Question 4

How is call price set?

Answer 4

Call price is generally set at or above, and expressed as a percentage of, the bond’s face value.

Question 5

What is conversion ratio?

Answer 5

Number of shares received upon conversion of a convertible bond, usually stated per $1000 of face value

Question 6

What is the conversion price?

Answer 6

Face value of a convertible bond divided by the number of shares received if the bond is converted

Question 7

How does convertible bond that are callable work?

Answer 7

With these bonds, if the issuer calls them, the holder can choose to convert into equity rather than let the bonds be called.

Question 8

How do you calculate the price per shar - convertible bond?

Answer 8

Face value / convertion ratio

Question 9

When will you choose to convert?

Answer 9

It the price of the stock exceeds the price you pay for converting to stock.

Question 10

What is a warrant?

Answer 10

Give holders the right (but not the obligation) to buy new common shares from the issuer at a fixed price anytime during the warrant’s life

Question 11

What does each warrant specify?

Answer 11

number of shares received upon exercise
corresponding price to pay (the exercise price)
time until when exercise can be made (maturity)

Question 12

Difference between warrant and convertible bond?

Answer 12

difference is that convertible holders deliver the bond instead of cash at maturity

Question 13

What is management buyout?

Answer 13

a company’s existing managers acquire a large part or all of the company from either the parent company or from the private owners.

Question 14

How does PE firms raise capital?

Answer 14

Private equity funds

Question 15

Why convertibles?

Answer 15

–Useful for young firms with relatively high volatility.
– If business goes well, the bondholders can convert to shares. (P>$50 in the
example above)
– If it goes bad, bondholders don’t convert and keep priority over the
shareholders
–Coupon rate is usually lower than for plain bonds.