DBDQ1 Convertible Bonds and DQ2 Market Value of Stock - Essay Example

DQ1 The use of debt instruments such as bonds can help companies acquire capital that can be used to develop new products, cover operating costs, orto expand into new marketplaces. A special type of bond is a convertible bond. A convertible bond can be defined as a bond that can be converted into a predetermined amount of a company’s equity during the lifetime of the bond (Investopedia, 2011). The issuer of the bond benefits from the bond conversation mechanism because the issuer can eliminate bonds from the marketplace when the market conditions are unfavorable.

Another reason a company might desire to convert a bond into equity is if the company does not want to pay of the principal of the bond due to cash flow problems. The bondholder of a convertible bond benefits from the conversion of a bond into equity when the prices of the common stocks in the market are higher than the principal. DQ2 The stock market is used by investors and businesses to buy and sell common stocks of corporations. The prices of a stock are influenced by a variety of factors.

The economy affects the prices of common stocks. When the economy is doing badly the prices of common stocks go down. Another factor that affects the price of a stock is the financial performance of a company. A solid financial performance reflected in the financial statements of the company can help increase the value of a stock. A third factor that affects the price of a specific stock is the market. The market risk is measured by the Beta coefficient (Besley & Brigham, 2002). Out of these three factors the only factor that the firm can control is the financial performance of the firm.

I consider the financial performance of the firm the most important factor. References Besley & Brigham (2000). Essential of Managerial Finance (12th ed.). Forth Worth: The Dryden Press. Investopedia.com (2011). Convertible Bond. Retrieved May 15, 2011 from http://www.investopedia.com/terms/c/convertiblebond.asp