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Unformatted text preview: shares would have to be issued because of their low market
price. This, in turn, could result in the dilution of existing ownership. Another
means of financing the call would be the use of debt or preferred stock, but this
use would leave the firm’s capital structure no less levered than before the call. Determining the Value of a Convertible Bond
The key characteristic of convertible securities that enhances their marketability
is their ability to minimize the possibility of a loss while providing a possibility of
capital gains. Here we discuss the three values of a convertible bond: (1) the
straight bond value, (2) the conversion value, and (3) the market value. 688 PART 6 Special Topics in Managerial Finance Straight Bond Value
straight bond value
The price at which a convertible
bond would sell in the market
without the conversion feature. EXAMPLE The straight bond value of a convertible bond is the price at which it would sell in
the market without the conversion feature. This value is found by determining
the value of a nonconvertible bo...
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This document was uploaded on 01/19/2014.
- Fall '13