Convertible Bonds originated in the mid-19th century, and was used by early speculators such as Jacob Little and Daniel Drew to counter market cornering.
what is a convertible bonds?
It is a debt instrument which gives the holders an option to convert them into another instrument. These bonds carry a fixed rate of interest. An option gives to exchange the bond for a predetermined number of shares in the issuing company. It is like that of other bonds, which has maturity and the coupon on the bond. It also has information about the conversion option for the bond if it is converted.
Convertible bond is a type of bond that the holder can exchange into a specified number of shares of common stock. It is a hybrid security with debt- and equity-like features. It is also called as callable bond or corporate bond or stock. These bonds are issued by companies with a low credit rating and high growth potential.
- It has a coupon payments and which is debt securities and legally enforceable.
- It combines the features of bonds and stocks in one instrument.
- Bonds are ranked prior to all securities in the nature of equity.
- The value of bonds depends on prevailing interest rates and credit level also.
- Feature of bond also gives them features of equity securities.
- Exchange is may specified price or conversion ratio.
- It has characteristics of fixed income securities.
- It offers Call features and Put features.
- Vanilla convertible bonds – it is plain convertible structures.
- Mandatory convertibles – it would force the holder to convert into shares at maturity.
- Reverse convertibles
- Packaged convertibles or sometimes Bond with Option
The following are the list of bonds which are most commonly used in corporate.
- Zero interest fully convertible bonds
- Double option bonds
Like that it may depends on the company’s level of financial position they offer. Its price may be related with underlying shares in prevailing market.
Any convertible bond structure, in its issuance prospectus:
- Conversion price – it is the price per share at which conversion takes place.
- Issuance premium – it is a price difference between the conversion and stock at the issuance.
- Conversion ratio – the number of shares into.
- Bond floor – Value of the fixed income element of a convertible.
- Date of Redemption – Final payment date of instrument, i.e., the principal and all interest is due to be paid.
- Date of Conversion – Final date at which the holder can request into shares. The conversion and redemption date may be different.
- Coupon rate – Interest payment paid at periodically to this bond holder from the issuer. Coupon rate may be fixed or variable.
- Yield – Yield of the convertible bond at the issuance date.
Normally these type of bonds are not spread equally. It has some differences exist between the regional markets. These bond investors get split into broad categories. It also likes hedged and Long-only investors. These bonds are safer than common shares for the investor. Bonds are generally less volatile than equity shares.
Originally posted 2015-01-29 01:48:02.