Why do corporations issue convertible securities?
The ability to convert a corporate bond or preferred stock to a common stock makes it more attractive to the investor. Issuing convertibles allows a company to increase outstanding shares and raise more money than if it had simply issued equity. The convertible raises more cash per new share than an equity would, because investors will pay more for the higher yield and downside protection offered by the convertible. In addition, the interest paid by the company on the convertible is tax deductible, while the dividends on common stock are not. Compared to issuing straight debt, companies can pay a lower coupon, because investors are willing to accept a lower current yield when they also have the option of converting to stock.
