of issuing shares and bonds as financial instrument
shares is useful for company to get funds without ban financing. A business
owner may have friends or family who are going to help out and in return for a
share in the company and looking for an
angel investor to give the company a capital injection (Lowndes Jordan, 2015).
There are some consideration of commercial and law for small business when it
is looking at taking a new shareholder. The main issue is always got denied is
the compliance problem with securities legislation. Moreover, the effect of the
law usually exist to protect investors and require company to take certain
steps before issuing shares to investors, this resources intended to be a small
overview of those laws.
the capital or to get funds by issuing bonds is the most alternative to sell the
shares because it allows a company to avoid releasing ownership as a part of
the business. A bond is a loan in the form of a debt security. The borrower
will owes to the lender a debt and the borrower has responsibility to pay back
the principal and the coupon on the maturity of the loan. Bond allows the
issuer to finance long-term investments with external funds (Patrick J Brown,
2006). The loan guarantee can be the buildings, company’s land and the other
physical assets that can be sold off if the issuer failed on repayment of the
principal. In bond markets, the wider range of assets can fulfill the function
share issue is an offer for investors by company or an industrial. These two
can raise equity in the market and very important from of investments for
common people but gain a long term risk capital. Despite of that bond or loan
stock issues to people or company to lend money on similar term for several
years and this has a long term debt capital. However, issuing bonds by taking a
debt is cheaper than bank overdraft or the cost of raising equity through a
share issue but also return on debt is tax deductible, since the return on
equity is paid out of a company’s profits which are taxed before dividend
payments can be made to stockholders.
issue has high risks for bondholders rise as more debt is issued and the higher
the debt to equity ratio then the greater the risk because the debt agreements
may turn out too limit for the company. A company is much influenced is more
likely as it has to meet the coupon payment without pay attention to income.
The cost to servicing the debt may rise beyond the ability to pay because of
external or internal events such as poor company management. The company may be
fined that problem runs in solvency problems if the amount of debt becomes
higher than the value of realizable assets itself. Thereby, the cost of debt
rises as it proportion rises in relation to equity. The major difference
between a share and a bond issue, there is a commitment to pay back the amount
of money that has been invested after a number of years. Thus, this is also
make easier to collect the money in the first place, business plan must shows
the ability to repay the loans or increasing another loan to repay the initial
investors within the time that already stated before.
The advantages of shares is if the shares have limited rights
to withdraw or are transferable there is no obligation to repay back to them.
Dividends are paid from profits if do not have profit, there is no dividend. Moreover
the important reason about share issue is lending organizations, which is do
not cover all financial requirement because really want to see the local
commitment evidenced by a share issue. However if you feel grants can cover all
of your investment needs, a share issue will be worthwhile. If well organized,
a share issue can attract a fresh layer of volunteers with a new ideas, get
press attention, and act as involving local businesses and support agencies.
Furthermore, share income is unlimited money, not related with achievement of
output with the result that often stitched to grants and you also no need to
wait six months for the result. In the other side bond issue will be financing
by raising debt is the useful way to monitor all of corporation’s health, as
the ability to pay back the debt reflects the overall financial stability of
is Stock Splits, Bonus Issues, and Right Issues
share split happens when a board of directors authorize a changes in the specified
value is made to lower the price market of share to make share more attractive
for potential investors. When a company’s share splits, the change in the
specified value is equal by equivalent change in the number of shares until the
total value that has been made still same. Director’s decision to split shares
of the company to increase the amount of stock which circulate at a certain
date, thereby issuing more shares to current shareholder (Dennis, 2002).
price in the market get affected by a share splits. In that during and after
split, the price of shares will decrease because the amount of stock
outstanding has been increased during the entire period. However, number of
outstanding and the price of shares change but capitalization market still
constant. Moreover, stock splits as the trading of company’s shares where at
least five shares are distributed to each four held (Jensen and Ross, 1969).
Likewise, stock splits is a process of increasing the outstanding amount of
shares by decreasing the value of shares proportion, recapitalization achieved
by changing the number of outstanding shares. In addition, stock splits only
increasing the number of outstanding shares without changing any underlying
risk and return characteristic of the firm (Weston, 1988). Among the firms that
are trading in 3 National Stock Exchange that have issued stock splits are;
East African Cables Ltd, Sasini Tea, Equity Bank, Mumias Sugar Company, and
Kenya Commercial Bank.
advantages from stock splits is, the amount of potential buyers will increase
because affordability of each shares is improved. The stock will automatically
start to rise in price because of buying frenzy. Thus, most of investors more
likely choose stocks that keep splitting because some of them conclude it as a
company’s future prospects. The drawback will arise if the company splits stock
and the price of the company itself falls. Further, shares may fall below this
requirement and will be taken out from exchange (Gallagher and Baker, 1980)
A bonus issues or script
issue is a stock split in which a company issuing new shares without charge to
bring its issued capital in line with its employed capital but increased
capital will available for company after profits. Thus, this usually happen after
company made profits and then increasing its employed capital. In other words,
a bonus issue can be seen as alternative to dividends. No new funds are raised
with a bonus issue.
Bonus shares are issued by cashing in on the free reserves of
the company. The company assets build up its reserves by retaining a half of
its profit over the year but the part that is not paid out as dividend).
However, these free reserves increase and the company want to issuing the bonus
issue can change a half of the reserves into capital.
main products are traded in the capital market is stock and the main purpose of
capital market in the country is trading stocks. In addition, traded in the
capital market have various types of bonds and stock derivatives. One of the
products of the derivative shares is a right issue or limited offer of shares.
right issue is a translation of the legal provisions which governing a
preventive right in every old shareholder in a limited liability company, where
every shareholder which listed in the shareholder list is entitled to get right
to buy every new or issued shares in the company portfolio. Right shares are
usually issued at a discount as compared to the prevailing traded price in the market.
The existing shareholders get allowed a prescribed time or date within which
need to exercise the right or the right will be forgotten. Right issue is the
common stockholders as the owner of the corporations have a preventive right to
subscribe to new offerings, these right have been interpreted in a limited way
(Brealy and Myres, 2000).
first feature of right issues is the rights shares may allow special treatment
to existing shareholders, where existing shareholder have right to purchase
shares at a lower price on or before a specified date. The shares are issued
with discount as a compensation for the stake dilution that will take place
post issue of additional shares. Second feature, the existing shareholders can
trade the right to other interested market participants until the date at which
the new shares can be purchased. In addition, the right are traded with the
same way as equity shares. The next feature is the amount of right issue for
shareholders usually at a proportion of existing holding. The last, existing
shareholders can choose to ignore the right. However, may not do as existing
shareholding will be diluted post issue of additional shares and make loss for
the result for existing shareholder.
A company may
look to raise a large capita amount for projects that may be have a longer
gestation period, some project where debt or loan may not available or suitable
or expensive usually makes the company raising capital by this way. Therefore,
company want to improve debt to equity ratio or searching to buy a new company
may opt for funding by right issue route however sometimes company’s problems
may issue right shares to pay back debt to ease the financial strain.
3.0 Convertible Bonds
3.1 Brief explanation of convertible bonds
Bonds are fixed income instruments that can be converted become fixed number of
shares of the issuer at the option of investor. Bonds can be converted become
other shares other than the issuers are called exchangeable bonds. Thus,
convertible is are attractive hybrid securities. On the other side, they have
the advantages of debt instrument that pay fixed coupon and will be redeemed at
maturity at a specific price that already determined before but enclosed
conversion option gives the investor with participation in upside potential
from underlying equity. Moreover, the conversion right give the bond holder
with the good choice than better-of-two-choices option. At maturity, the
convertible bonds are worth the higher of their redemption it means the price
which the issuer had agreed to buy back that bonds or the market value of the
underlying shares. Furthermore, a convertible Bond is a straight bond with an
attractive equity call option, due to this call option, the convertible will
participate in increase of underlying equity. However, the fixed income gives
capital protection if the share price fall.
Characteristic of convertible bonds
3.2.1 Payoff profile
The x-axis display the
underlying share price when y-axis shows the price of the Convertible Bond. The
dotted diagonal points the intrinsic value that also called parity. Parity
deliberate the value that the investor will receive upon conversion of the bond
and parity is a lower boundary for the price of the convertible. Furthermore,
the yellow line outlines is convertible’s fair value if the share price raises,
the fair value of the convertible bond increases as well. Thus, as the price
increases, the relation between shares and bonds become more direct until the
bond price behavior and risk profile feature characteristic of the underlying
equity. On the other hand, if the price share decreases, the bond’s sensitivity
to its underlying share price will fall and the bond will not fall until the
same extent as the equity. The level will prevent convertible from falling
further down is shown in the above graph as the bond floor(grey) which is also
a lower boundary for the price of convertible.
Same as straight debt, a
convertible have the risk of the issuer not being able to pay back the
principal at maturity. That credit risk is explained in the graph as the steep
fall of the bond floor as the bond price on the left-hand side. Moreover, the
best risk-return profile is in red area where the convertible’s potential
upside is the biggest while the downside risk is relatively low. RMF focuses on
convertible bonds priced in that area.
3.2.2 Investment Categories
22.214.171.124 Yield instrument
Bonds where the underlying share price trades is below the conversion price
have low equity sensitivity and run like fixed income securities. The major
price factors are the interest rate level and the issuer’s credit spread.
126.96.36.199 Hybrid instrument
Bonds where the underlying share price trades close to the conversion price are
deal with balanced convertibles because of their asymmetric payoff figure. They
have a medium sensitivity to change in the underlying equity. That all bonds
are influence by the share price performance and excitability movements as the
change in interest rates and the issuer’s credit figure. The main of new issues
send off as balanced convertibles.
Bonds where the underlying share price trades extremely above the conversion
price are highly responsive to change in the equity considering their
responsive to change in interest rates and/or credit spreads is low. These
bonds trade at a pointless premium or even a small discount to parity. Deep-in-the-money
convertibles will almost exactly be reformed into the underlying shares at