Laursen plc has in issue 10 per cent convertible bonds which will be redeemed in 10 years' time. The bonds have a nominal value of £100 and are currently selling at £93 per bond. Interest on the bonds is paid annually and each bond is convertible into 25 shares at any time over the next two years. The current market price of Laursen plc's ordinary shares is £3.20 per share and this is expected to increase by 14 per cent per year for the foreseeable future. Laursen plc has a cost of debt of 12 per cent.
(a) Advise an investor holding some of Laursen's convertible bonds as to which of the following courses of action to take:
(i) sell the convertible bond now;
(ii) Convert the bond now or within the next two years;
(iii) Hold the bond to maturity.
(b) Explain the importance to an investor of the distinction between convertible bonds and bonds with warrants attached.