Convertible Bonds
A convertible note, if it has a maturity of more than 10 years, then referred as a convertible debenture is a type of bond that the investor can convert into shares of common stock in the supplying company at an agreed upon price. It is a type of hybrid security with debt and equity equivalent characteristics. Even though, in a typical manner, it has a lower coupon rate. The instrument bears additional value via the alternative to convert the bond to stock. By that means, take part in further growth in the company's equity value. The investor gets the potential upper side of conversion into equity while assisting negative aspect with cash flow from the coupon payments.
From the issuer's point of view, the main do good of raising money by selling convertible bonds is a reduced cash interest payment. The reward for companies of issuing convertible bonds is that, if the bonds are exchanged to stocks, debt of company disappears. All the same, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is decreased due to the stock dilution anticipated when bondholders convert their bonds into new shares.
Alike any typical bond, convertible bonds also have an issue date, issue size, maturity date, face value, maturity value and coupon. They also have the following major features:
Conversion price:
It is the nominal price per share at which conversion is taking place.
Conversion ratio:
It is the number of shares each convertible bond exchanges into. It can be expressed per bond or on a per centum i.e per 100 basis.
Parity value:
It is multiplication of Equity price and Conversion ratio.
Parity value= Equity price × Conversion ratio.
Conversion premium:
It constitute the divergence of the market value of the CB equated to that of the parity value.
Call features: The power of the issuer on some bonds to call a bond early for redemption, sometimes subject to particular share price performance. The aim is to boost investors to convert early into equity, which has now become worth more than the bond's face value, by endangering repayment in cash for what is now a less amount.
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