Chapter 19, Problem 14P

a.

Summary Introduction

To explain: The action taken by the bondholders in case the firm makes an announcement that they will call the bond of Defense System Inc.

Introduction:

Convertible bonds:

These are those bonds that provides the right to the bondholder to get their bonds converted into common stock which is the share of the corporation.

Callable Bonds:

The nature of callable bonds is somewhat like a non-callable bond which has a call option that belongs to the issuer. The call options become more and more valuable to the issuer when there is a decline in interest rates.

b.

Summary Introduction

To calculate: The price of bonds of Defense System Inc.

Introduction:

Bond:

It is a long term loan borrowed by corporations, organizations, or the government for thepurpose of raising capital. It is issued at fixed interest depending upon the reputation of thecorporation and also termed as fixed-income security.

c.

Summary Introduction

To explain: The discretion in converting or continuing the holding of bonds of Defense System Inc.

Introduction:

Bond:

It is a long term loan borrowed by corporations, organizations, or the government for thepurpose of raising capital. It is issued at fixed interest depending upon the reputation of thecorporation and also termed as fixed-income security.