Corporate Accounting Convertible Bonds

Question: Discuss about theCorporate Accounting for Convertible Bonds. Answer: Value of Bond Market Value of Bond:- Coupon Rate per annum 5.5% Semi Annual Coupon Rate 0.0275 Coupon Payment ($) 27.5 Given Yield Rate 6% Semi Annual Yield Rate 0.03 Total Period (in Years) 10 Fair Value of Bonds 962.8063128 Table 1: Value of bond New Wacc New WACC Particulars Amount Weight Cost Tax Rate Weighted Cost Equity 3625 42% 5.67% 2.394% Total Equity 3625 42% 5.67% 2.394% Bonds 100 2.02% 5.50% 0.111% Other Interest Bearing Liabilities 4862 97.98% 5.84% 5.722% Total Debt 4962 58% 3.371% Total Capital 8587 100% 30% 4.75% Table 2: New WACC Change of Yields During Convertible Bonds Bonds, which can be convertible into shares or equity, are known as convertible bonds. Albul, Jaffee and Tchistyi (2015) opines that most of the modern business organization use convertible bonds in order to lower down the actual coupon rate. This will further lower down the yield to maturity of the bond, as it will the return will get transferred to shares. In the given case, the yield to maturity of the bonds of Qantas will come down from 6 percent. However, the exact rate will be determined based on conversion ratio of the bonds. If the conversion ratio of the bond is higher, then the yield to maturity is decrease by a large amount and vice versa (De Spiegeleer Schoutens and Van Hulle 2014). Urquhart and Hudson (2013) infer that there are three types of efficient market hypothesis. These are weak, semi-strong and strong. In a weak efficient market hypothesis, it can be assumed that past interest and stock rates have no impact on future rates and decisions for the organization in the efficient market hypothesis. In this hypothesis, the return rate is considered independent. In case of semi-strong market hypothesis, all the information related to the organization is publically available and all the information will be reflected upon the share prices of the organization. Strong efficient market hypothesis assumes that all the public and private information are readily available to the public. The share price movements of Qantas will have several implications on efficient market analysis. The market will adjust automatically based on the behavior of the stock. It can be also inferred that market efficiency depends upon the availability of the investors. Therefore, it can be said that more and more investors will be attracted and share price will move up. The market will have excess volatility during the first two days and market interest rates are likely to increase (Boboc and Dinica 2013). In the given case scenario, the organization Qantas has announced full year result and this will have a considerable impact on the movement of their stock price. This will fall in the version of semi-strong efficient market analysis. On 23rd August, the stock price of the organization will go up. This is mainly because, the shareholders of the organization will be expecting positive results in terms of return on invested capital from the organization. On 24th August, share prices will grow further up, as the return on invested capital of the organization has increased to 22.7 percent from 16.2 percent in comparison with the previous year. On the other hand, the stock price will become less volatile from next day onwards (Westerlund and Narayan 2013). References Albul, B., Jaffee, D.M. and Tchistyi, A., 2015. Contingent convertible bonds and capital structure decisions.Available at SSRN 2772612. Boboc, I.A. and Dinica, M.C., 2013. An algorithm for testing the efficient market hypothesis.PloS one,8(10), p.e78177. De Spiegeleer, J., Schoutens, W. and Van Hulle, C., 2014.The Handbook of Hybrid Securities: convertible bonds, coco bonds and bail-in. John Wiley Sons. Urquhart, A. and Hudson, R., 2013. Efficient or adaptive markets? Evidence from major stock markets using very long run historic data.International Review of Financial Analysis,28, pp.130-142. Westerlund, J. and Narayan, P., 2013. Testing the efficient market hypothesis in conditionally heteroskedastic futures markets.Journal of Futures Markets,33(11), pp.1024-1045.