In this chapter we consider three specific types of options employed by business firms in their financing – the convertible security, the exchangeable bond, and the warrant. In the Appendix to the chapter, a detailed discussion of option pricing theory appears. | Chapter 22 Convertibles, Exchangeables, and Warrants © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI Convertibles, Exchangables, and Warrants Convertible Securities Use of Convertibles Value of Convertible Securities Exchangeable Bonds Warrants Derivative Security -- A financial contract whose value derives in part from the value and characteristics of one or more underlying assets (., securities, commodities), interest rates, exchange rates, or indices. Derivative Security Straight debt or equity cannot be exchanged for another asset, but options are exchangeable. An option is part of the broader category of derivative securities. We examine the convertible security, exchangeable bond, and warrant in this chapter. Convertible Security -- A bond or a preferred stock that is convertible into a specified number of shares of common stock at the option of the holder. Convertible Security This provides the convertible holder a fixed return (interest or dividend) and the option to exchange a bond or preferred stock for common stock. The option allows the company to sell convertible securities at a lower yield than it would have to pay on a straight bond or preferred stock issue. Conversion Price -- The price per share at which common stock will be exchanged for a convertible security. It is equal to the face value of the convertible security divided by the conversion ratio. Convertible Security Conversion Ratio -- The number of shares of common stock into which a convertible security can be converted. It is equal to the face value of the convertible security divided by the conversion price. FunFinMan, Inc., has an issue of 8%, $100 par value preferred stock outstanding. The security has a conversion price of $30 per share. What is the conversion ratio? Conversion Example Conversion Ratio = $100 par value / $30 conversion price = shares Antidilution and the Convertible . | Chapter 22 Convertibles, Exchangeables, and Warrants © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI Convertibles, Exchangables, and Warrants Convertible Securities Use of Convertibles Value of Convertible Securities Exchangeable Bonds Warrants Derivative Security -- A financial contract whose value derives in part from the value and characteristics of one or more underlying assets (., securities, commodities), interest rates, exchange rates, or indices. Derivative Security Straight debt or equity cannot be exchanged for another asset, but options are exchangeable. An option is part of the broader category of derivative securities. We examine the convertible security, exchangeable bond, and warrant in this chapter. Convertible Security -- A bond or a preferred stock that is convertible into a specified number of shares of common stock at the option of the holder. Convertible Security This .
