Question

Valentino's Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty five shares of common stock. The current market price of Valentino's stock is $35 per share.

1. Explain why Valentino’s might choose to issue convertible bonds.
2. Explain why investors might choose to purchase Valentino’s convertible bonds.

Answer 1

The reasons are as follows:

Step-by-step explanation:

The reasons are as follows:

1. In the case of the convertible bonds it would be sold at a higher price at the lesser rate of interest as compared to that bonds that do not have a feature of conversion

2. The investor would choose the convertible bonds of Valentino as it would be beneficial to the investor in the case when the common stock market price is above $40 per share i.e. ($1,000 ÷ 25)

And, if the price increased to $50 per share so the total value would be

= 25 shares × $50

= $1,250

In these ways it should be chosen