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3. Convertible bonds, warrants, and other exotic bond features
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As the name suggests, convertible bonds allow the owner the option to convert the bonds into a fixed number of
shares of common stock.
Innovative Energy LLC is a start-up company that just raised $100,000 to conduct a third-party feasibility study on
its business model. The company agreed to treat the $100,000 investment as debt at 10% interest rate; however,
the investor has the right to exchange the debt for common stock during the company's next financing round. Which
of the following terms best describes the $100,000 investment?
Convertible bond
Warrant
Consider the case of an investor, Nazim:
Nazim wants to include bonds in his investment portfolio, but he wants the option to sell the bond to the issuer at a
specified price at a certain date before the maturity of the bond. Which of the following bond redemption features
should he pick?
Putable bond
Convertible bond
Nazim also recently bought bonds with a clause stating that interest will be paid only when the company has enough
earnings to pay for it. Nazim has invested in
putable bonds
income bonds
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