In Practice Security Innovation and Changing Capital Structure

While the changes in leverage discussed so far in this chapter have been accomplished using traditional securities such as straight debt and equity, firms that have specific objectives on leverage may find certain products that are designed to meet those objectives. Consider a few examples:

• Hybrid securities such as convertible bonds are combinations of debt and equity that change over time as the firm changes. To be more precise, if the firm prospers and its equity value increases, the conversion option in the convertible bond will become more valuable, thus increasing the equity component of the convertible bond and decreasing the debt component (as a percent of the value of the bond). If the firm does badly and its stock price slides, the conversion option (and the equity component) will become less valuable and the debt ratio of the firm will increase.

• An alternative available to a firm that wants to increase leverage over time is a forward contract to buy a specified number of shares of equity in the future. These contracts lock the firms into reducing their equity over time and may carry a more positive signal to financial markets than would an announcement of plans to repurchase stock, since firms are not obligated to carry through on these announcements.

A firm with high leverage, faced with a resistance from financial markets to common stock issues, may consider more inventive ways of raising equity, such as using warrants and contingent value rights. Warrants represent call options on the firm's equity whereas contingent value rights are put options on the firm's stock. The former have appeal to those who are optimistic about the future of the company and the latter make sense for risk averse investors who are concerned about the future.

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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