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Introduction
Analysis
to and
Finance
Control
Prepared By:
Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
mosarof@du.ac.bd
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Chapter 9: Bonds and Convertibles
Bond:
A long-term debt instrument in which a borrower agrees to
make payments of principal and interest, on specific dates, to
the holder of the instrument by securing sufficient collateral is
called bond.
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Chapter 9: Bonds and Convertibles
Types of long term debt:
(B) Unsecured bonds:
(i) Debenture
(ii) Subordinated debenture
(iii) Income bond
Terms:
Indenture agreement
Protective covenants
Leverage buyout
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Chapter 9: Bonds and Convertibles
Convertible securities:
Conversion ratio:
Conversion price:
Investment value:
C 1 F
PV 1 T
r (1 r ) (1 r ) T
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Chapter 9: Bonds and Convertibles
CIR Inc. has 7%, Tk.10000 coupon bonds in the market that
have 10 years left to maturity. The bonds make annual
coupon payments. If the discount rate is 8.5%, what is the
investment value?
Conversion value:
amount of money the convertible would be worth if it were
converted into common stock. It equals the multiplication of
conversion value and common stock price.
Market value:
The value at which convertibles are selling in the market
among investors.
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Chapter 9: Bonds and Convertibles
Conversion premium:
Difference between the convertible’s market value and its
conversion value. It equals market value minus conversion
value divided by conversion value.
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Chapter 9: Bonds and Convertibles
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Chapter 9: Bonds and Convertibles
Repay old bond principal $100,000,000
(+)Pay call premium @ 7% 7,000,000
(-) Net proceed from new bond 98,000,000
Before tax Initial additional investment 9,000,000
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Chapter 9: Bonds and Convertibles
Old bond:
Before tax annual interest expense $10,000,000
(-) Tax savings on interest and amortized
floatation cost [(10,000,000+75000)X0.40] 4,030,000
After tax interest expense 5,970,000
New bond:
Before tax annual interest expense $8,000,000
(-) Tax savings on interest and amortized
floatation cost [(8,000,000+100000)X0.40] 3,240,000
After tax interest expense 4,760,000
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Chapter 9: Bonds and Convertibles
Net present value = $1,210,000(PVIFA0.048,20) – $5,600,000 =
$ 9,737,960
Bond should be refunded.
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