Convertible Bond
A convertible bond is a fixed income debt issuance made by a corporation which has a call option attached to it. This gives the possibility to the investor to convert the fixed income instrument into equity of the issuing company.
A convertible bond pays a pre-determined amount of money in interests just like any other bond.
They’re issued by companies wanting to raise more capital in order to invest it into the company.
The conversion usually can happen only in pre-determined times and it’s up to the bondholder to decide wether to use the conversion option or not.
These characteristics make the convertible bond a hybrid instrument which works just like any other bond but has a call option sort of feature attached to it.
The convertible bond also has a pre-determined conversion ratio. For example, one bond can be converted in 10 shares of the issuing company.
An investor may pick a convertible bond to have a fixed income that gives more earning potential that a normal bond. Usually convertible bonds have lower interests compared to traditional bonds. That’s because gives more rights to the investor.
Companies can decide to issue convertible bonds for different reasons:
It can be done to pay less interest on the bond, that’s because investors value the call option attached to it. Convertible bonds can be valuable because they’re more covered on the downside compared to the common stock and gives the opportunity to take part on the upside.
Companies also use convertible bonds to postpone the process of dilution due to the debt accumulation.
But dilution will happen if the convertible bond holders later decide to convert in common stock.
#convertiblebond #fixedincome #assetmanagement
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