Convertible Bonds
Convertible bonds are hybrid investments which have characteristics of both bonds
and common stock. In other words it has both debt and equity features. Really, convertible
bonds give the holder the ability to convert the bonds into shares of common stock of the issuing company at some
predetermined ratio.
Ultimately, there are many factors that determine how and when a bond can be converted. These are all predetermined
factors. The conversion price, for example, is the nominal price per share at which the conversion will take place.
The conversion ratio is the number of shares each bond will convert into.
Why would a company issue convertible bonds?
as taken from
Investopedia
Issuing convertible bonds is one way for a company to minimize negative investor interpretation
of its corporate actions. For example, if an already public company chooses to issue stock, the market
usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this
negative impression, the company may choose to issue convertible bonds, which bondholders will likely
convert to equity anyway should the company continue to do well.
From the investor's perspective, a convertible bond has a value-added component built into it; it
is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return
in exchange for the value of the option to trade the bond into stock.
