Question

Blue Corp. issued $21,600,000 par value 11% convertible bonds at 97. If the bonds had not been convertible, the company's investment banker estimates they would have been sold at 95.

Kingbird Company issued $21,600,000 par value 11% bonds at 96. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $4.
Suppose Sepracor, Inc. called its convertible debt in 2020. Assume the following related to the transaction. The 12% $10,900,000 par value bonds were converted into 1,090,000 shares of $1 par value common stock on July 1, 2020 On July 1, there was $55,000 of unamortized discount applicable to the bonds, and the company paid an additional 578,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

Answer 1

When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value, causing the price to be lower than the face value of the bond.

Step-by-step explanation:

When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value. In the given scenario, the 8% bond becomes less attractive compared to other bonds paying higher interest rates, causing its price to be lower than its face value. The risk associated with the bond's lower interest rate leads the bond seller to lower its price to induce investors to buy the bond.