Answered A company may retire bonds by all but which of the following means?

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A man examines the inscription Bonds with a magnifying glass. Assessment of the value and profitability of securities. Investment. Terms and conditions. Face value. Raise money to finance new projects

Another way to retire bonds is by exchanging them for shares of the company. This is called a “conversion” and allows the issuer to reduce risk. 

Bondholders get something more secure, while shareholders take on less risk, since they don’t have to worry about defaulting on their debt obligations.

Do you know that a company may retire bonds by all but which of the following means?

The process can be done in one of two ways: either existing shareholders can buy the bonds back (giving up some potential gains) or new shareholders buy into the company that’s issuing new equity (raising capital).

Here are some points discussed about A company may retire bonds by all but which of the following means-

1. Convertible debenture.

This is similar to a bond and, like bonds, has the value based on some percentage of the company’s net assets.  

However, a convertible debenture is generally issued by smaller companies that have fewer assets than a typical bond issue.  It can be converted into shares at some predetermined conversion price (debt swap) or at another predetermined future time.

2. Conversion preference shares.

These are debt instruments issued at par or face value and whose interest rate is fixed for a specified period, typically five or ten years.  Like bonds, they mature in that time period and shareholders are repaid their principal plus interest from cash flows generated from operations of the company. 

Unlike bonds, the company can choose to either repay them or convert them into common shares at a predetermined conversion ratio.

3. Warrants.

A warrant, or option to buy stock, is issued with each bond and allows the holder to buy a predetermined amount of shares within a specified time period (usually one year).  

The “warrant” can be exercised anytime before the expiration date.  After the bonds mature, these warrants may be sold on an exchange or in the over-the-counter market if they remain outstanding after the conversion date.

4. Rights.

These are also known as, “preferred stock” or “preference shares,” typically issued by larger companies as part of their capital structure (with fully-paid ordinary shares) and usually paying a dividend.  

They are not redeemable except by cash (although occasionally the company can negotiate a redemption prior to converting the rights into fully paid ordinary shares).  

They will continue to hold their value until the company either sells them or is forced to do so in a bankruptcy.  Both conversion and redemption are possible.

5. Callable debt securities.

This is where interest is “callable” (that is, the issuer can require you to pay back your principal plus accrued interest upon maturity) at some risk-adjusted price between par and 50% of par, usually less than par.  This risk is reflected in the call price  (which is different from the conversion price).

6. Demand debentures.

These are floating rate notes that are sold at a discount to par and thus have no maturity date, unlike fixed-interest debt securities (that is, they “never” mature).  

They are repaid by a stream of payments based on a formula that typically includes a minimum principal payment plus a fixed interest payment to be made every six months until maturity.  These may be converted into common shares prior to maturity at some predetermined conversion ratio, usually less than 100%.

7. Registered warrants.

A warrant is a call option that gives the holder the right to buy shares at a fixed price for a specific period of time, which may be as long as five years.  It has no maturity date.  As such, it is similar in nature to a debenture.

8. Convertible preferred stock.

This consists of two classes of securities: issued shares and those authorized but unissued.  Issued shares can be converted at any time into common shares at the option of the company and are typically sold on an exchange although they are also issued privately (that is, not registered).  

Authorized but unissued shares cannot be converted and are typically sold privately, although they may be issued to employee benefit plans.  These trades may or may not be exchangeable.

9. Warrants at a discount.

A warrant is a call option that gives the holder the right to buy shares at a fixed price for a specific period of time, which may be as long as five years.  It has no maturity date.  As such, it is similar in nature to a debenture.  

A warrant can be exercised anytime before the expiration date and its value will rise with increases in the price of the underlying stock (assuming the warrant holder has exercised prior options).

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