644 Part Seven Debt Financing
bre44380_ch24_618-651.indd 644 10/05/15 12:54 PM
d. Is the debenture “bearer” or “registered”?
e. At what price was the issue callable in 2005?- Bond contracts Look at Table 24.1:
a. Suppose the debenture was issued on September 1, 1992, at 99.489%. How much would
you have to pay to buy one bond delivered on September 15? Don’t forget to include
accrued interest.
b. When is the first interest payment on the bond, and what is the total dollar amount of the
payment?
c. On what date do the bonds finally mature, and what is the principal amount of the bonds
that is due to be repaid on that date?
d. Suppose that the market price of the bonds rises to 102 and thereafter does not change.
When should the company call the issue? - Private placements Explain the three principal ways in which the terms of private place-
ment bonds commonly differ from those of public issues. - Debt characteristics True or false? Briefly explain in each case.
a. It is better to hold unsecured bonds than secured bonds in the event of default.
b. Many new and exotic debt securities are triggered by government policies or regulations.
c. Call provisions give a valuable option to debt investors.
d. Restrictive covenants have been shown to protect debt investors when takeovers are
financed with large amounts of debt.
e. Privately placed debt issues often include stricter covenants than public debt. However,
public debt covenants are more difficult and expensive to renegotiate. - Convertible bonds Maple Aircraft has issued a 4¾% convertible subordinated debenture
due 2020. The conversion price is $47.00 and the debenture is callable at 102.75% of face
value. The market price of the convertible is 91% of face value, and the price of the common
is $41.50. Assume that the value of the bond in the absence of a conversion feature is about
65% of face value.
a. What is the conversion ratio of the debenture?
b. If the conversion ratio were 50, what would be the conversion price?
c. What is the conversion value?
d. At what stock price is the conversion value equal to the bond value?
e. Can the market price be less than the conversion value?
f. How much is the convertible holder paying for the option to buy one share of common stock?
g. By how much does the common have to rise by 2020 to justify conversion?
h. When should Maple call the debenture? - Convertible bonds True or false?
a. Convertible bonds are usually senior claims on the firm.
b. The higher the conversion ratio, the more valuable the convertible.
c. The higher the conversion price, the more valuable the convertible.
d. Convertible bonds do not share fully in the price of the common stock, but they provide
some protection against a decline.
INTERMEDIATE- Bond pricing Suppose that the J.C. Penney bond was issued at face value and that investors
continue to demand a yield of 8.25%. Sketch what you think would happen to the bond price