Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).

Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:

• it will dilute their control

• the interest payments will be higher therefore reducing liquidity

• it will increase the gearing ratio therefore increasing financial risk

Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.

Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?
A . The convertible bond may not dilute control as the bond holder has an option to choose
conversion.

B . The coupon rate on the convertible bond will be lower than that on a non-convertible bond.
C . When converted into shares, the company will receive a cash inflow which can be used for future investments.
D . Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.
E . Over the life of the bond, a convertible will be more expensive than a non-convertible.

Answer: A,B,D

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