Sei sulla pagina 1di 11

Financial

Introduction
Analysis
to and
Finance
Control

Prepared By:
Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
mosarof@du.ac.bd

1
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.

Types of long term debt:


(A) Secured bonds:
(i) Mortgage bonds
(ii) Equipment trust certificate
(iii) Collateral trust bonds

2
Chapter 9: Bonds and Convertibles
Types of long term debt:
(B) Unsecured bonds:
(i) Debenture
(ii) Subordinated debenture
(iii) Income bond

Important bond features:


Principal/par value/face value
Coupon
Maturity
Call provision
Sinking fund provision
Convertibility
Bond ratings
Bond refunding
3
Chapter 9: Bonds and Convertibles
Other types of long term debt:
Junk bond
Zero coupon bond
Variable rate bond

Terms:
Indenture agreement
Protective covenants
Leverage buyout

Advantages and disadvantages of debt financing:

4
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

5
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.

6
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.

Example of a bond refunding:


Newton Tire Company is considering refunding its old bonds.
Interest rates have dropped since Newton issued bonds 10
years ago, and the company is trying to determine if is it
economically advantageous to refund now. Pertinent data are
as follows:

7
Chapter 9: Bonds and Convertibles

Old bond New bond


Par value $100,000,000 Par value $100,000,000
Remaining life 20 years Life 20 years
Coupon rate 10% Coupon rate 8%
Call price $1070 per bond Floatation cost $ 2,000,000
Unamortized floatation cost
$1,500,000

Tax rate 40%, required rate is 4.8%

8
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

Tax deductible expenses:


Call premium 7,000,000
(+) Unamortized floatation cost 1,500,000
Total 8,500,000
Tax savings @40% 3,400,000
After tax initial additional investment (9,000,000-
3,400,000)= 5,600,000

9
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

Annual after tax interest expense savings (5,970,000-


4,760,000) $1,210,000

10
Chapter 9: Bonds and Convertibles
Net present value = $1,210,000(PVIFA0.048,20) – $5,600,000 =
$ 9,737,960
Bond should be refunded.

11

Potrebbero piacerti anche