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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Delta plc finances an acquisition by issuing convertible bonds rather than straight debt. Which is the main reason the convertible carries a lower coupon than straight debt?

The coupon is lower because investors receive a call option to convert into the issuer's shares. That option has value and is paid for by the investor accepting a lower interest rate than on equivalent straight debt.

  1. AHolders receive an option to convert into equity, which has value and compensates them for the lower interestCorrect
  2. BThe bonds are secured on the target's assets
  3. CConvertible interest is not tax deductible, so the issuer can accept a lower rate
  4. DThe bonds rank behind ordinary shares on liquidation

Explanation

The conversion option is valuable to the investor, so they accept a lower coupon in exchange. Convertible interest is normally tax deductible, security is not the reason, and bonds always rank ahead of ordinary shares.

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