4. 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.

Jorge bought APJ Inc.s convertible bond at par ($1,000) with a yield of 3.25%. This bond had a conversion ratio of 25:1 at the price of $40 per share. If APJ Inc.s shares are currently trading at $48 per share, should Jorge convert his bond into shares?

Which of the following best describes the difference between a convertible bond and a warrant?

A. 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. B. 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 bonds in his investment portfolio, but he wants the option to sell the bond to the issuer at a specified price at a certain date before the maturity of the bond. Which of the following bond redemption features should he pick?

A. Putable bond B. Convertible bond

Nazim also recently bought bonds with a clause stating that interest will be paid only when the company has enough earnings to pay for it. Nazim has invested in _______ .

A. Income bonds B. Purchasing power bonds