Convertibles, Warrants, and Derivatives参考.ppt

Convertibles, Warrants, and Derivatives 19 Chapter Outline Converting convertible securities to common stock Convertible securities may move with the value of common stock Interest rates on convertible securities Warrants Accountant requirements of convertibles and warrants Derivative securities Convertible Securities A bond or share of preferred stock that can be converted, at the option of the holder, into common stock When a convertible debenture is initially issued, a conversion ratio to common stock is specified Ratio indicates the number of common stock shares of converted debentures To get the conversion price, the par value of the bond is divided by the conversion ratio Value of the Convertible Bond Must evaluate the conversion privileges Other values to be considered include: Conversion value Conversion premium Pure bond value Downside risks Floor value Price Movement Pattern for a Convertible Bond Pricing Pattern for Convertible Bonds Outstanding, January 2008 prices Is this Fool’s Gold? Drawbacks: Once convertible debentures begin to increase in value, the downside protection becomes redundant If interest rates in the market rise, the floor value, or the pure bond value, could fall, creating more downside risk Purchaser of the convertible bond normally also pays a premium over the conversion value The purchaser is always asked to accept below-market rates of interest on the debt instrument Convertibles may also suffer from the attachment of a call provision Advantages to the Corporation Interest rate paid on convertible issues is lower May be the only way a small corporation may enter the bond market Attractive to a corporation that believes its stock is currently undervalued The price of a stock may go up if the issuance of common stock or convertibles is delayed by an appropriate time Disadvantages to the Corporation Size of convertible bond market is small compared to markets for nonconvertible corporate bonds and common stocks Firms selling convertib