Convertible debt and straight debt issued with warrants are similar securities, because both are debt securities that represent potential equity claims on the issuer's assets. In fact, convertible debt can be thought of as straight debt plus nondetachable warrants. However, several important distinctions do exist. Use the following table to indicate whether the characteristic listed refers to convertible bonds or to debt with warrants: Characteristic When exercised, the issuing firm receives new equity capital. When exercised, new claims on shareholders' equity are created, but no capital is transferred. These securities tend to have higher flotation costs. Convertible Bonds Debt with Warrants If a firm experiences rapid growth subsequent to convertible or bond-with-warrant issues, does that make it more or less likely that the securities will be converted or exercised? Less likely to be converted or exercised More likely to be converted or exercised
Convertible debt and straight debt issued with warrants are similar securities, because both are debt securities that represent potential equity claims on the issuer's assets. In fact, convertible debt can be thought of as straight debt plus nondetachable warrants. However, several important distinctions do exist. Use the following table to indicate whether the characteristic listed refers to convertible bonds or to debt with warrants: Characteristic When exercised, the issuing firm receives new equity capital. When exercised, new claims on shareholders' equity are created, but no capital is transferred. These securities tend to have higher flotation costs. Convertible Bonds Debt with Warrants If a firm experiences rapid growth subsequent to convertible or bond-with-warrant issues, does that make it more or less likely that the securities will be converted or exercised? Less likely to be converted or exercised More likely to be converted or exercised
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Convertible debt and straight debt issued with warrants are similar securities, because both are debt securities that represent potential equity claims
on the issuer's assets. In fact, convertible debt can be thought of as straight debt plus nondetachable warrants. However, several important
distinctions do exist. Use the following table to indicate whether the characteristic listed refers to convertible bonds or to debt with warrants:
Characteristic
When exercised, the issuing firm receives new equity capital.
When exercised, new claims on shareholders' equity are created, but no capital is transferred.
These securities tend to have higher flotation costs.
Convertible Bonds Debt with Warrants
If a firm experiences rapid growth subsequent to convertible or bond-with-warrant issues, does that make it more or less likely that the securities will
be converted or exercised?
Less likely to be converted or exercised
O More likely to
be converted or exercised
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