HB 311 1st Edition Lecture 10 Convertible Bonds Unsecured bonds that are exchangeable for a fixed number of shares of the company s stock at the bondholder s discretion Allows bondholders to participate in a stock s price appreciation should the firm be successful Conversion ratio represents the number of shares of stock that will be received for each bond Bond s par value conversion price Conversion price is the implied stock price if bond is converted into a certain number of shares Usually set 15 30 higher than the stock s market value at the time the bond is issued Effect on Earnings Per Share Diluted EPS Upon conversion convertible bonds cause dilution in EPS EPS drops due to the increase in the number of shares of stock Thus convertible bonds have the potential to dilute EPS Therefore convertible bonds will impact the calculation of Diluted EPS according to FASB 128 Registration Transfer Agents and Owners of Record Bearer bonds vs registered bonds Bearer bonds In possession of the bearer loss and theft risk These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute interest payment is made to the bearer of the bond Registered bonds A record of registered securities is kept by a transfer agent Payments and interest are sent to owners of record as the dates as of the dates the payments are made Types of Bonds Secured Bonds and Mortgage Bonds Backed by value of assets of issuing company At default bond holders secure assets and sell First bondholders paid before other creditors Mortgage bond secured with real estate Debentures Unsecured bonds based on creditworthiness of company Higher risk and thus require higher return Advantage to issuing firm is ability to raise debt capital without being secured with asset collateral Subordinated Debentures and Senior Debt Relates to lower ranked in payoff priority Senior debt holder is paid off before a subordinated debt holder Subordinated debt holder will require a higher interest rate because this debt is riskier than senior debt As a borrower you may have two interest rates Lower for senior debt Higher for subordinated debt Eurobonds bonds denominated in one currency and sold in another country Borrowing overseas example suppose Disney decides to sell 1 000 bonds in France These are U S denominated bonds trading in a foreign country Why do this If borrowing rates are lower in France To avoid SEC regulations