Looking for the answer to the question below related to Financial Management ?
Irredeemable bond is also known as
Options:
| A. Fully convertible bond B. Perpetual bond C. Partially convertible bond D. None of these |
The Correct Answer Is:
- B. Perpetual bond
The correct answer is B. Perpetual bond.
A perpetual bond, often referred to as an irredeemable bond, is a unique type of bond that has distinct characteristics setting it apart from other bond types. Let’s delve into the reasons why this answer is correct in detail, as well as why the other options are not applicable.
Why B. Perpetual bond is the correct answer (Irredeemable bond):
- No Maturity Date: Perpetual bonds do not have a maturity date, which means they have no specific time frame for repayment. Unlike most bonds, which have a fixed term, perpetual bonds can technically last forever. The issuer is not obligated to repay the principal amount, making them “irredeemable” in the sense that they are not subject to redemption by the issuer.
- Fixed Interest Payments: Despite lacking a maturity date, perpetual bonds typically offer fixed interest payments to bondholders. These interest payments are made at regular intervals, often annually or semi-annually, and are usually based on a fixed percentage of the bond’s face value.
- No Conversion Feature: Perpetual bonds do not contain any conversion features, making them different from fully convertible bonds (Option A). Fully convertible bonds give bondholders the option to convert their bonds into a predetermined number of common shares of the issuer’s stock. Perpetual bonds lack this feature entirely.
Now, let’s discuss why the other options are not correct:
A. Fully convertible bond:
Fully convertible bonds are quite distinct from perpetual bonds. They allow bondholders the option to convert their bonds into common shares of the issuer’s stock at a predetermined conversion price. This feature provides investors with the potential for equity ownership in the issuing company, which is not a characteristic of perpetual bonds. Thus, Option A is not correct in this context.
C. Partially convertible bond:
Partially convertible bonds also offer conversion features, but they differ from fully convertible bonds. In the case of partially convertible bonds, only a portion of the bond’s face value can be converted into common shares. The remaining portion remains as a fixed-income security.
Like fully convertible bonds, partially convertible bonds have a specified maturity date, unlike perpetual bonds. Therefore, Option C is not correct because it describes a different type of bond.
D. None of these:
Option D is not the correct answer because, as we’ve discussed, the term “irredeemable bond” is often used interchangeably with “perpetual bond” to describe a specific type of bond with no maturity date and fixed interest payments.
In conclusion, an irredeemable bond is synonymous with a perpetual bond, as both terms describe a type of bond that lacks a maturity date, provides fixed interest payments, and does not have any conversion features. The other options (fully convertible bond, partially convertible bond, and none of these) describe different types of bonds with distinct characteristics, making them incorrect in the context of describing an irredeemable bond.
