Laursen plc has in issue 10 per cent convertible bonds which will be redeemed in 10 years’

time and which are currently selling at £93. Interest on the bonds is paid annually and each £100 bond is convertible into 25 shares at any time over the next two years.

The current market price of Laursen plc’s ordinary shares is £3.20 per share and this is expected to increase by 14 per cent per year for the foreseeable future. Bonds of a similar risk class have a cost of debt of 12 per cent.

(a) Advise an investor holding some of Laursen’s convertible bonds as to which of the following courses of action to take:

(i) sell the convertible bond now;

(ii) convert the bond now or within the next two years;

(iii) hold the bond to maturity.

(b) Explain the importance to an investor of the distinction between convertible bonds and bonds with warrants attached.