Warrants

CFA Level I
#21

Bonds with discounts understate CFF, overstate net CFO of the company issuing the debt

#22

all i know is that warrants lower IE, which has higher operating cash flow, if this is not the case then schweser is going to be ripped a new one!

#23

IE is lower because th IE is calculated as YTM*book value of debt

#24

map1 Wrote: ------------------------------------------------------- > Bonds with discounts understate CFF, overstate net > CFO of the company issuing the debt You are right map…I was referring to getter

#25

lol strange im going to get you bud!

#26

map1 Wrote: ------------------------------------------------------- > IE is lower because th IE is calculated as > YTM*book value of debt Stalla says " The discount amortization increases interest expenses as compared to a normal convertible bond" hence interest expense are higher…

#27

yes but the IE expense on bonds with warrants is in comparison with conventional bonds othe the same company, now on market interest rates

#28

getterdone Wrote: ------------------------------------------------------- > yes but the IE expense on bonds with warrants is > in comparison with conventional bonds othe the > same company, now on market interest rates From Stalla: " Straight bonds have a lower interest interest coverage ratio compared to convertible bonds or bonds with warrants due to higher interest expenses" So thanks for clarify…I was a bit confused at this point!

#29

exactly, straight bonds have lower interest coverage due to higher IE

#30

Bond with warrant should be treated as discount bond. Thus IE is higher than vanilla bond. The debt component is increased by the bond value minus the warrant value which is added to the equity. ROE will be lower, D/E will also be lower. CFO will also higher because CFO for a discount bond is overstated. So I believe the correct answer is C & D.

#31

this is what schweser says in its summary of bonds with warrants: Versus conventional debt: Lower interest expense Higher operating cash flow Lower balance sheet liability

#32

getterdone Wrote: ------------------------------------------------------- > this is what schweser says in its summary of bonds > with warrants: > > Versus conventional debt: > > Lower interest expense > Higher operating cash flow > Lower balance sheet liability while what does it says regarding the CFO in the case of a discount and premium bond?

#33

its no offered @ a lower rate in comparison to market rates. It is in comparison to conventional bonds. Think like this even though the interest rate on the warrants are lower, the bonds could trade @ par due to the value of the warrant. Investors will pay more for the bond with the lower coupong because of the warrant option. in this case, the IE would be lower

#34

Ah I stand corrected. Yes the bond *will* have lower interest expense than the similar priced conventional bond. Although it is treated as discounted bond the value of the discount bond will be lower than the conventional bond because of the warrant value. Thus Schweser is correct. It does have lower interest expense.

#35

yes! on this high note I am calling it a night lol happy studying guys, see you tomorrow

#36

I think the only correct answer is D bcoz the bond without warrant can be convertible or conventional bond. Int expense : Coventional bond > warrant > convertible CFO: Conventioanl < convertible = warrants pg 486 CFAI text (FSA) As interest can be lower or no so it is not a definite answer and same for CFO Increase in D/E will be less than conventional or convertible so, A is false the last choice D is correct.