Convertible bonds, warrants, and other exotic bond features As the name suggests

Question

Convertible bonds, warrants, and other exotic bond features As the name suggests, convertible bonds allow the owner the option to convert the bonds into a fixed number of shares of common stock. Which of the following best describes the difference between a convertible bond and a warrant? Convertible bonds give the investor the option to exchange bonds for shares at a certain price, whereas warrants give the investor the option to buy shares at a certain price. Convertible bonds give the investor the option to buy shares at a certain price, whereas warrants give the investor the option to exchange bonds for shares at a certain price. Consider the case of an investor, Nazim: Nazim wants to include putable bonds in his investment portfolio. Nazim is likely to put the bonds when: He expects to use the cash when the bond matures He is in need of cash Nazim also recently bought bonds that have their interest rate tied to the consumer price index (CPI) so that he will be protected if inflation rates increase. Nazim has invested in

Explanation / Answer

QUESTION 1

Option A is correct by definition.

A convertible bond can be converted into a predetermined amount of the underlying company's equity at certain times during the bond's life, usually at the discretion of the bondholder.

Warrant on the other hand is a security that gives holder the right to buy the underlying stock of the issuing company at a fixed price.

QUESTION 2

He is in need of cash. Putable bonds are bonds with options, that provide investor right, and not obligation, to sell the bond and demand early repayment of principle. Hence, Nazim would get cash by using the put embedded in his putable bond.

QUESTION 3

Treasury Inflation Protected Securities (TIPS). TIPS is basically a treasury security that is indexed to inflation and shields the investors from negative impact of inflation. Interest rates on these bonds remain fixed. It is the par value which is linked to inflation. Increase in inflation increases par value of bond, that is paid at maturity

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