Question

HMM is debating whether to issue a callable bond or a convertible bond to raise funds.

(a) Discuss the circumstances under which callable bond will be issued and when these bonds will be called back.

(b) Discuss when the company will issue a convertible bond and when the bond will be converted by shareholders.

(c) Discuss which of these bonds will have a higher yield to maturity and why?

Answer 1

A) callable bonds are bonds which can be called by the company before maturity for redemption they will be issued if the firm thinks that interest rates will fall in future and they will be called when present value of savings is more than the costs associated with new issue at lower rates

B) convertable bonds are bonds which has the option to convert bonds to equity shares they will be issued when the company thinks that issuing share will create negitive sentiment in equity holders.it will be exercised when it is profitable

C) callable bonds has higher yield because of risks associated with call back

And convertable bonds have higher price because of optimisim about share price