CFA Practice Question

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CFA Practice Question

Select the correct statements.

I. The economic effect of issuing a convertible bond is substantially the same as that of issuing a debt instrument with an early settlement provision and options to purchase shares.
II. When bonds are converted, there is no effect on cash flows.
III. Convertible bonds would change both the numerator and denominator of the debt-to-equity ratio.
Correct Answer: All of the above

User Contributed Comments 6

User Comment
sleepless II: The conversion is a significant non-cash financing activity.
holt the conversion from LT Debt to Equity simply shifts the book value of the Convertible Bond from LTDebt to Equity.
This causes the ratios of LTDebt/TotalCapital to be affected in both numerator and denominator.
gazza77 I disagree with II. When the bond is converted there is no requirement to pay coupons and therefore cash outflows are reduced
gill15 Gazza's got a point --- I agree with him...

anybody ?
Shaan23 Gazza is correct but it says WHEN(at that point of time). Initially it will have no affect on CF's
ascruggs92 gazza this refers to the journal entry made when a bond is converted. It is a bit ambiguous though because the term "cash flows" could imply for the period and not just this transaction
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