Describe the features of three common types of options that may be used by firms in their financing– the convertible security, the exchangeable bond, and the warrant.
Understand why these securities with option features may be attractive for a firm's long-term financing needs.
Explain the different terms used to express value for convertible securities - conversion value, market value, and straight-bond value.
Calculate the value of convertible securities, exchangeable bonds, and warrants and explain why premiums over different values occur.
Understand the relationship between an option instrument and its underlying security.
Derivative Security – A financial contract whose value derives in part from the value and characteristics of one or more underlying assets (e.g., securities, commodities), interest rates, exchange rates, or indices.
Straight debt or equity cannot be exchanged for another asset, but options are exchangeable.
An option is part of the broader category of derivative securities.
We examine the convertible security, exchangeable bond, and warrant in this chapter.
