Suppose B. Co. Ltd. issues bonds with following terms: Issue price of Bond ₹2000, Coupon rate 2% with maturity period of 2 years, Convertible into equity shares @ ₹100 per share. Y has subscribed for 5 bonds and made an

CS Executive · Securities Laws and Capital Markets · PYQS · December 2021
Suppose B. Co. Ltd. issues bonds with following terms: Issue price of Bond ₹2000, Coupon rate 2% with maturity period of 2 years, Convertible into equity shares @ ₹100 per share. Y has subscribed for 5 bonds and made an investment of ₹10,000. On maturity date, investor will have an option to either claim full redemption amount or convert the Bonds into equity @ ₹100 per share. The quoted share price on maturity date is ₹150. If he goes for conversion how many shares Y will get? Will it be fair enough if he opts for redemption value? Calculate which option is best suitable to Y?

Answer & Explanation:

Issue Price per Bond is = ₹ 2000/- Coupon rate = 2% Maturity period = 2 years Convertible into equity per share will be @ ₹ 100/- Option-I: Y the investor has subscribed for 5 bonds. The total investment made by him will be ₹ 10,000/-He is entitled to get interest @2% p.a. The interest will be ₹ 400 (₹ 10,000*2% for 2 years) Thus his total investment for 2 years period becomes ₹ 10,400/- and the conversion price of equity on maturity will be ₹ 100/- Therefore, he will get 104 equity shares i.e. 10,400/100 Option-II: If the Equity shares are quoted at ₹ 150/- per share on maturity date, then Y will get 104 x ₹ 150 = ₹ 15,600. Therefore, Y can opt for conversion of Bonds in to Equity shares rather than accepting the maturity redemption value of ₹ 10,400/-

Topics: Bonds and Debentures

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