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Case Solution Wells Fargo Convertible Bonds
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What are the most significant risks in convertible bonds?
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Because convertible bonds are fixed income instruments, the number one risk to consider is credit risk. Convertibles are also highly correlated to equity markets. Balanced convertible bond strategies are most impacted when the value of the convertible portfolio’s underlying stocks declines.
Are convertible bonds high risk?
Also, most convertible bonds are considered to be riskier/more volatile than typical fixed-income instruments. Investors receive fixed-rate interest payments with the option to convert to stock and benefit from stock price appreciation.
What is one disadvantage of investing in convertible bonds?
To the corporation, convertible bonds entail significantly more risk of bankruptcy than preferred or common stocks. Furthermore, the shorter the maturity, the greater the risk.
What are the risks of convertible notes?
- High Risk: Convertible notes can be very risky investments. …
- Lack of Control: In most cases, the true value of convertible notes is not determined either by the investor or by the founders. …
- Equity Dilution: Convertible notes are a form of early-stage financing.
Which are the risks associated with a convertible bond arbitrage strategy?
While volatile underlying stocks are desirable, the position will lose money if the hedge ratio is estimated or traded incorrectly. The main bond risks in a convertible arbitrage trade are interest rate risk, call/takeover risk and credit risk, as most CBs are below investment grade.
What happens when convertible bonds are converted?
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A convertible bond pays fixed-income interest payments, but can be converted into a predetermined number of common stock shares. The conversion from the bond to stock happens at specific times during the bond’s life and is usually at the discretion of the bondholder.
What happens when a convertible note converts?
Generally, convertible notes convert into shares (the “Conversion Shares”) at a qualified equity financing round (this term should be defined in the note and usually means a preferred financing round of a minimum size) at the lower of two different prices per share: (1) the price per share using the conversion cap ( …
Do convertible bonds automatically convert?
Sometimes, the trigger on a convertible bond is share price performance. In those cases, the bonds convert automatically as soon as the company’s stock reaches a set price. Such automatic conversions are a bone of contention among some investors and shareholder advocates.
What happens if a convertible bond is not converted until its maturity date?
Similar to regular bonds, a convertible bond comes with a maturity date and pays interest to investors. In addition, if an investor decides not to convert their bonds to equity, they will receive the bond’s face value at the maturity.
What happens when a convertible note reaches maturity?
Most convertible notes, like other forms of debt, provide that they are due at the maturity date, usually 18 to 24 months. Occasionally, convertible notes will provide that at maturity they automatically convert to equity, or convert to equity at the option of the lender.
What happens to convertible bonds at maturity?
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Similar to regular bonds, a convertible bond comes with a maturity date and pays interest to investors. In addition, if an investor decides not to convert their bonds to equity, they will receive the bond’s face value at the maturity.
What happens when a convertible bond matures?
Similar to regular bonds, a convertible bond comes with a maturity date and pays interest to investors. In addition, if an investor decides not to convert their bonds to equity, they will receive the bond’s face value at the maturity.
Do convertible bonds automatically convert?
Sometimes, the trigger on a convertible bond is share price performance. In those cases, the bonds convert automatically as soon as the company’s stock reaches a set price. Such automatic conversions are a bone of contention among some investors and shareholder advocates.
What happens to convertible bonds when interest rates rise?
Convertible bonds, like all fixed income securities, are subject to increased loss of principal during periods of rising interest rates and are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other …
What happens when convertible debt is not converted at maturity?
If a note has not converted by its maturity date, the investor and company must spend time and energy deciding what to do (usually, they extend the maturity date). These problems exist because convertible notes were not originally designed for seed financings.
How do you solve a convertible bond?
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The conversion price of the convertible security is the price of the bond divided by the conversion ratio. If the bonds par value is $1000, the conversion price is calculated by dividing $1000 by 5, or $200. If the conversion ratio is 10, the conversion price drops to $100.
How do you calculate convertible bonds?
The conversion price of the convertible security is the price of the bond divided by the conversion ratio. If the bonds par value is $1000, the conversion price is calculated by dividing $1000 by 5, or $200. If the conversion ratio is 10, the conversion price drops to $100.
How do you calculate the dilution of a convertible bond?
- Basic EPS = (12,000 – 2,000)/10,000 = 1. If the convertible bonds are converted into shares, the total new shares issued will be:
- \= 50*100 = 5,000. If the convertible bonds are converted into shares, there will be no interest expense. …
- Diluted EPS = (12,000 – 2,000+1,800)/(10,000+5,000) = 0.78.
How do you calculate equity in a convertible bond?
The equity & liability portion for the convertible bonds can be calculated using the Residual Approach. This approach assumes that the value of the equity portion is equal to the difference between the total amount received from the proceeds of the bonds and the present value of future cash flows.
How do you calculate the cost of capital for a convertible bond?
The formula is as follow: Conversion Ratio = Number of Common Shares/Number of Bonds. Conversion premium is the amount by which the market value of the convertible surpasses the market value of the shares into which the bonds will be converted.
References:
Wells Fargo Convertible Bonds – Case Study Solution
Wells Fargo Convertible Bonds Harvard Case Solution & Analysis
Wells Fargo Convertible Bonds Case Study Solution
Wells Fargo Convertible Bonds Case Analysis and Case Solution
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