Bond and Loan

Boan and Loan act very different according to the agreement.

Basically bond and loan is issue when the company is need of money and want to borrow money from the share holders instead of borrowing money from bank.

In bond / loan; the company will agree on a fixed interest rate pay to the loan / bond share holder. BUT normally this interest rate is low and is not attractive.

Because the company does not want to pay out cash on the expiry date;

Normally Bond and Loan will issue the Irredeemable Convertible Unsecured Loan Stock (ICULS).

And this is the part that make loan / bond more interesting.

ICULS is totally based on the aggrement; it can be structure in:

i)  Loan / Bond + Fixed Price to exchange to mother share at the expiry date
or
ii) Fixed Number of loan / bond to exchange to mother share
or
iii) Any other method based on Agreement

Again, example will give a better picture:

Berjaya Loan - ICULS

Loan share holder can exchange to mother share with

i) 2 warrant convert to 1 mother share at the expiry date
or
ii) 1 warrant + RM 0.50 to exchange to 1 mother share at expiry date

This gives a various way for you to determine the FAIR PRICE of this loan

Case 1
Let say Currently BJ Corp at RM 1.50

If we use (i) method; the FAIR PRICE of this loan should be
RM 1.50 / 2 = RM 0.75

If we use (ii) method; the FAIR PRICE of this loan should be
RM 1.50 - RM 0.50 = RM 1

IF THE ACTUAL MARKET value this loan at (i) method, RM 0.75; then everyone might want to buy it because once you are having the share; you can choose the (ii) method to exchange on the mother share

So, the Fair Price in this case should follow on (ii) method which is RM 1

Case 2
Let say Currently BJ Corp is at RM 0.80

If we use (i) method; the FAIR PRICE of this loan should be
RM 0.80 / 2 = RM 0.40

If we use (ii) method; the FAIR PRICE of this loan should be
RM 0.80 - RM 0.50 = RM 0.30

IF THE ACTUAL MARKET value this loan at method (ii) RM 0.30; then everyone might want to buy it because once you are having the share; you can choose the (i) method to exchange on the mother share

So, the Fair Price in this case should follow on (i) method which is RM 0.40

Note: In Bond / Loan Market, the agreement can be different. And you can only redeem the mother share at its expiry date. You will need to monitor closely on the mother share value according too the agreement.