Financial Questions regarding Bonds, Warrants & Convertibles
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How do companies manage the maturity structure of their debt?
How can knowledge of call options help a financial manager to better understand warrants and convertibles?
As an investor are convertible securities advantageous or disadvantageous? Why?
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Solution Summary
This solution discusses how companies manage the maturity structure of their debt, call options which help financial managers beter understand warrants and convertibles and finally the advantages and disadvantages of convertible securities.
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How do companies manage the maturity structure of their debt?
Firms tend to match assets with liabilities, and more profitable firms have more long-term debt. Long-term debt has a positive effect on firms' performance, but this is not true when a large fraction of that debt is subsidized. The authors empirically investigate the determinants and consequences of the maturity structure of debt, using data from a panel of UK and Italian firms.
They find that in choosing a maturity structure for debt, firms tend to match assets and liabilities, as both conventional wisdom and some recent theoretical models suggest. They conclude that more profitable firms (as measured by the ratio of cash flow to capital) tend to have more long-term debt. This finding is consistent with the dominant role played by firms' fear of liquidation and loss of control associated with short-term debt. It may also reflect the willingness of financial markets to provide long-term finance only to quality firms.
How can knowledge of call options help a financial manager to better understand warrants and ...
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