Embedded Options Benefiting Investors: PRC International Floating Rate Convertible Bond Offering

C

The embedded options mentioned in the question are the 10% cap on the floating interest rate, the accelerated sinking fund provision for principal repayment, and the conversion option on the convertible bonds. We need to determine which of these options is most likely to benefit the investor.

Let's analyze each option:

A. 10% cap on the floating interest rate: This option limits the maximum interest rate that can be charged on the floating rate convertible bond to 10%. In other words, if the 90-day LIBOR rate exceeds 10%, the interest rate will be capped at 10%. This option benefits the issuer (PRC International) rather than the investor because it limits the potential interest payments the issuer needs to make. Therefore, this option is less likely to benefit the investor.

B. Accelerated sinking fund provision for principal repayment: This provision requires PRC International to retire $5.6 million of the bond principal per year, with the option to retire up to $10 million. An accelerated sinking fund provision allows the issuer to retire the bond's principal earlier than the stated maturity date. While this provision benefits the issuer by reducing its debt obligations, it does not directly benefit the investor unless the bond is retired at a premium to its face value. Therefore, this option may not be the most likely to benefit the investor.

C. Conversion option on the convertible bonds: This option allows the bondholder to convert the bond into a predetermined number of shares of the issuer's common stock. Typically, convertible bonds have a conversion price specified in the indenture. If the market price of the common stock exceeds the conversion price, the bondholder can convert the bond into shares and potentially benefit from the appreciation in the stock price. This option provides the potential for capital appreciation and allows the investor to participate in the equity upside of the issuer. Therefore, the conversion option on the convertible bonds is the most likely option to benefit the investor.

In conclusion, the most likely option to benefit the investor is the conversion option on the convertible bonds (option C).