© 2000 John Petroff
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© 2000 John Petroff |
Corporations will offer additional benefits to bondholders when they have run out of protective covenants to offer. Sweetener are also occasionally used to reduce yield, or make the bond especially attractive and easy to sell. There are two major types of sweeteners: these are conversion rights and warrants previously extensively introduced.
a)- A conversion right stated in the
body of the indenture allows the bondholder to exchange the bond
for common stock at a predetermined conversion rate during a stated
conversion period. To the bondholder (as for the preferred shareholder),
this provision gives an opportunity for capital gains, a hedge
against inflation, and a cheap method of acquiring a stock which
ought to be rising in price. Naturally, the promise looks better
when the bond is issued than later if the stock price fails to
go up. But in that case, the bondholder loses nothing by just
holding on to the bond until it is retired. If the conversion
is beneficial, the bondholder may still want to hold on to the
bond for its safety. The corporation may force the conversion
on bondholders by using a call provision that often is also present
in the indenture.
b)- Warrants, as previously discussed, give bondholders benefits similar to conversion rights. But they constitute separate securities that can be sold independently of the bond. They give the right to acquire a number or fraction of common share(s) at an exercise price which is usually higher than the market price. As seen in Chapter 3, warrants have a time value representing the opportunity of the common stock to rise in the future even when the exercise price is still above the market price.
c)- Income bonds give the promise of participating in the profits of the corporation if profits are higher than some specified level.
d)- Floating rate bonds assure bondholders that coupon payments will stay in step with inflation.
e)- Dual or multiple currency denominated bonds have two or more par values expressed in two or more currencies giving the bondholder a choice of receiving payment(s) in the currency most advantageous to him/her. This type of bond is obviously issued by multinational corporations with investors in different countries. Investors avoid foreign exchange risk. There are many variations of this type of bonds, including foreign bonds which are sold in a specific foreign country and euro-currency bonds which are sold anywhere outside of the domestic market of that currency (and which should not be confused with bonds denominated in Euros). A manual on international financial markets should be consulted for further explanations and attractiveness of this sort of issues.
See review questions Q-12D3.1 through !-12D3.3.
See research assignment R-12D3.1
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