Question

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, Nazem:
Nazem 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?
Warrants
Puttable bond
Nazem also recently bought bonds that have their interest rate tied to the consumer price index (CPI) so that he will be protected if inflation rates increase. Nazem has invested in:_________

Answer 1

Answer: 1. Convertible bond

2. Putable bond

3. Purchasing power bond.

Explanation:

The $100,000 investment is a convertible bond. This is a fixed-income debt security which yields interest payments. It should be noted that it can also be converted to equity shares or common stock.

Nazeem should pick a putable bond. This is because the puttable bond has a put option that is embedded ans he can also demand his principal to be paid early.

Nazem also recently bought bonds that have their interest rate tied to the consumer price index (CPI) so that he will be protected if inflation rates increase. Nazem has invested in purchasing power bond .