Notes on Convertible Bonds (2-7-2011)

# Notes on Convertible Bonds (2-7-2011) - calls the bond the...

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1. In February 2007, Xilinx announced a sale of 30-year bonds that would generate \$900 Million for their company. The coupon rate on the bonds was 3.125% below the rates on long-term government bonds at the time. 2. Under what circumstances could a tech firm offer bonds with a coupon rate lower than government bonds? 3. Each Xilinx bond with a face value of \$1,000 could be converted into 32.076 shares of stock. 4. What is the conversion ratio? 32.076 5. What is the conversion price? \$1,000/32.076 = \$31.18 6. What is the current conversion value if the current stock price is \$25.98? 32.076*\$25.98 = \$833.33

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1. Convertible Bonds are bonds with a call option attached. The call option has some value, but the option is usually “deep out of the money” at issuance. 2. Firms retain the right to call the bonds, usually at a premium over par. When a firm
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Unformatted text preview: calls the bond, the bondholders have the choice to take the cash or to convert the bond into shares. For example, a firm will issue bonds with a call price of 102, then if they call the bond, they pay shareholders \$1,020, or the shareholders can convert their bond into equity. 3. So, under what circumstances should a firm call its convertible bonds? 1. Never call bonds less than the conversion price. This would transfer wealth from shareholders to bondholders unnecessarily. 2. Firms should not wait until the price of the bond raises substantially above the call price. If they do, bondholders can convert their bonds to shares and essentially be purchasing shares at a discount. 4. Why would a firm issue convertible bonds?...
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Notes on Convertible Bonds (2-7-2011) - calls the bond the...

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