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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

Why do issuers often include a premium redemption (yield to maturity) feature in FCCBs that investors may choose not to convert?

Issuers add a redemption premium because FCCBs carry a low coupon in exchange for the conversion option. If shares do not perform and holders do not convert, the premium gives them an adequate yield at maturity, making the issue attractive to investors.

  1. ATo compensate investors for accepting a lower coupon in return for the conversion optionCorrect
  2. BTo make the bond ineligible for conversion
  3. CTo convert the bond into a domestic rupee loan automatically
  4. DTo avoid any foreign currency liability

Explanation

FCCBs usually carry a low coupon because of the embedded conversion option. If the share price does not rise enough, investors do not convert, so a redemption premium provides a yield to maturity that makes the bond attractive. It does not remove conversion rights or foreign currency exposure.

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