What is a Convertible Bond?
A convertible bond is a type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. Although it typically has a low coupon rate, the holder is compensated with the ability to convert the bond to common stock, usually at a substantial premium to the stock’s market value. Other convertible securities include exchangeable bonds, where the stock underlying the bond is different from that of the issuer; convertible preferred stock, which is similar in valuation to a bond, but with lower seniority in the capital structure; and mandatory convertible securities, which are short duration securities—generally with high yields—that are mandatorily convertible upon maturity into a variable number of common shares based on the stock price at maturity. From the issuer’s perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. However, in exchange for the benefit of reduced interest paym
Convertible bonds are a type of corporate bond that can be converted into shares of common stock at some point during the ownership of the bond. Usually, corporate bonds of this type may be converted into common stock once the bond has reached full maturity. However, there are examples of the convertible bond that allow this conversion to take place at some point prior to the point of full maturation. It is important to note that an investor is under no obligation to actually exchange the bond for a comparable number of shares of common stock. The function of the convertible bond makes this a possibility, but not a necessity. Defined as being a form of junior debenture, the convertible bond simply makes it possible for the bond holder to receive shares of stock rather than realize a cash return on the bond proper. A convertible bond can be an appealing situation for investors. Generally, a convertible bond issue is considered to be low risk, but still providing the potential to take ad
A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade in the bond for shares in the company that issued it. This gives the bondholder both a fixed-income investment with coupon payments as well as the potential to benefit from an increase in the company’s share price. The additional value of the conversion option, however, will mean that the coupon payment on the bond will be lower than that of an equivalent bond with no conversion option. A convertible bond issue, like that of other bonds, will state the maturity and the coupon on the bond. A convertible bond also has information about the conversion option, or how many shares will be received for the bond if it is converted.
As the name implies, convertible bonds, or converts, give the holder the option to exchange the bond for a predetermined number of shares in the issuing company. When first issued, they act just like regular corporate bonds, albeit with a slightly lower interest rate. Because convertibles can be changed into stock and thus benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. If the stock performs poorly there is no conversion and an investor is stuck with the bond’s sub-par return (below what a non-convertible corporate bond would get). As always, there is a tradeoff between risk and return. Conversion Ratio The conversion ratio (also called the conversion premium) determines how many shares can be converted from each bond. This can be expressed as a ratio or as the conversion price, and is specified in the indenture along with other provisions. Example A conversion ratio of 45:1 means one bond (with a $1,000 par value) can be exchange
