Convertible bonds

(noun)

A convertible bond is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price.

Related Terms

Examples of Convertible bonds in the following topics:

  • Overview of Convertible Securities

    • Convertible securities are convertible bonds or preferred stocks that pay regular interest and can be converted into shares of common stock.
    • A convertible bond (CB) is a type of bond that can be converted into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price.
    • Convertible bonds are usually issued offering a higher yield than obtainable on the shares into which the bonds convert.
    • Convertible bonds have all the features of typical bonds, plus the following additional features:
    • Conversion ratio: The number of shares each convertible bond converts into.

  • Other Types of Bonds

    • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
    • Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
    • Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
    • A serial bond is a bond that matures in installments over a period of time.
    • Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.

  • Advantages of Bonds

    • In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
    • Most individuals who want to own bonds do so through bond funds.
    • Bonds are often liquid.
    • There are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.
    • A bond is an instrument of indebtedness of the bond issuer to the holders.

  • Long-Term vs. Short-Term Financing

    • A corporate bond is a bond issued by a corporation to raise money effectively so as to expand its business.
    • Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date.
    • Other bonds, known as convertible bonds, allow investors to convert the bond into equity.
    • Capital notes are a form of convertible security exercisable into shares.
    • Many times, capital notes are issued in connection with a debt-for-equity swap restructuring: instead of issuing the shares (that replace debt) in the present, the company gives creditors convertible securities – capital notes – so the dilution will occur later.

  • Convertible Stock

    • A convertible security, such as convertible preferred stock, is any security that can be converted into another.
    • This refers to any security that can be converted into another security.
    • Convertible securities can include bonds that pay interest or preferred stocks that pay dividends.
    • Preferred shares rank higher to common stock during earnings distributions, such as dividends; however, they are subordinate to bonds in terms of their claim to company assets in the event of a business liquidation.
    • Accounting principles require the reporting of convertible preferred stock in the same manner as non-convertible preferreds.

  • The Valuation of Bonds

    • This coupon bond is a U.S.
    • Bearer Bonds: Who possesses these bonds receive the interest payment.Coupon bonds are usually bearer bonds.
    • Debenture Bonds are unsecured bonds.Thus, the corporation does not pledge assets for the bond issues.A corporation must be financially strong to issue these bonds because these bonds rely on the corporation's credit standing.
    • Convertible Bonds: Bondholders have the right to exchange the corporate bonds into corporate stock on a specified date.
    • Municipal Bonds: City and county governments issue municipal bonds to finance local projects.These bonds are popular with investors because the U.S. government does not tax their interest earnings.Consequently, municipal bonds usually pay lower interest rates than other bonds.

  • Preferred Stock

    • It is senior (i.e. higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company).
    • In other words, in the case of liquidation or bankruptcy, preferred stock will have claim to assets before common stock, but after corporate bonds or other debt instruments.
    • Similar to bonds, preferred stocks are rated by the major credit-rating companies.
    • Some examples are prior preferred stock (highest priority), preference preferred stock, convertible preferred stock (exchangeable for common stock), cumulative preferred stock, exchangeable preferred stock, participating preferred stock, putable preferred stock, monthly income preferred stock, and non-cumulative preferred stock.
    • Preferred Stocks are considered a hybrid security with properties of both stocks and bonds, but are subordinate to bonds when it comes to rights of claim to company assets.

  • Indenture

    • A bond indenture is a legal contract issued to lenders that defines commitments and responsibilities of the seller and the buyer.
    • A bond indenture (also called a trust indenture or deed of trust) is a legal contract issued to lenders.
    • The specifications given within the bond indenture define the responsibilities and commitments of the seller as well as those of the buyer by describing key terms such as the interest rate, maturity date, repayment dates, convertibility, pledge, promises, representations, covenants, and other terms of the bond offering.
    • The issuer of a bond will use the indenture to describe detail about the issuer and the bond trustee for interested investors to research the background of the bond issue.
    • Bond indenture (also trust indenture or deed of trust) is a legal contract issued to lenders.

  • Comparing Common Stock, Preferred Stock, and Debt

    • Preferred stock can (depending on the issue) be converted to common stock and have access to accumulated dividends and multiple other rights.
    • Debt can be "purchased" from a company in the form of a bond.
    • In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.
    • Therefore, a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.
    • Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure.

  • Taxes and Bond Prices

    • Taxes can cause bond prices and interest rates to differ.
    • For example, the U.S. government bonds have a lower risk of default and higher liquidity than municipal bonds, whereas municipal bonds are the state and local government bonds.
    • Government has exempted municipal bonds from federal taxes.
    • On the other hand, the taxed bonds are not as attractive as an investment, so investors buy fewer bonds, causing bond prices to fall and interest rates to rise.
    • Therefore, municipal bonds have a lower interest rate than U.S. government bonds.