Question

Financial services firms play an important role in any developed economy, so identify and discuss benefits of debt equity swap in generating profit for financial institutions. (20 points)

Answer 1

A debt/equity swap is a transaction in which the obligations or debts of a company or individual are exchanged for something of value, equity. In the case of a publicly traded company, this generally entails an exchange of bonds for stock. The value of the stocks and bonds being exchanged is typically determined by the market at the time of the swap.

Thus debt equity swap reduces the debt of the company hereby reduction in accounts payable and hence increase in profits of the company.