Convertible bonds

DailyFinance  Mar 20  Comment 
NEW YORK, NY -- (Marketwired) -- 03/20/14 -- China Metro-Rural Holdings Limited (NYSE MKT: CNR) (the "Company") is pleased to announce the closing of a private placement of US$10,000,000 principal amount, 10 per cent convertible bonds due 2016...
Financial Times  Feb 28  Comment 
Proceeds will be put towards Tesla’s plan to build a new battery factory that has energised investors and powered its shares to a record high
DailyFinance  Jan 29  Comment 
TORONTO, ONTARIO -- (Marketwired) -- 01/29/14 -- Just Energy Group Inc. (TSX:JE)(NYSE:JE) ("Just Energy" or the "Company") is pleased to announce today that it has closed its previously announced European-focused offering (the "Offering") of USD...
DailyFinance  Jan 28  Comment 
NEW YORK, NY -- (Marketwired) -- 01/28/14 -- China Metro-Rural Holdings Limited (NYSE MKT: CNR) (the "Company") is pleased to announce the closing of a private placement of US$5,000,000 principal amount, 10 per cent. convertible bonds due 2016...
Forbes  Jan 23  Comment 
Netflix should issue a convertible bond right now.
SeekingAlpha  Dec 29  Comment 
By David Merkel: I sometimes answer questions for those at that ask basic investing questions. Usually I point to old articles of mine, but this time someone asked a question that I have not answered before, and here it is: ...


Convertible bonds are hybrid securities that have both debt and equity features. Like a normal straight bond, the buyer receives coupon payments at the interest rate specified on the bond until maturity, when the company redeems the bond at par. However, the bond holders also have the option to convert the bond's value into the issuing company's shares at an agreed-upon pre-specified ratio.

Advantages and disadvantages for the investor and the issuer

Because of its dual nature as a bond and an equity option, convertible bonds allow investors to participate possibly in the upside gains of the stock while protecting possible downside through the guaranteed continuous coupon payments. Companies have incentive to raise convertible debt, rather than traditional debt, because the interest payments on convertible bonds are usually lower, thus allowing the issuer to lock in a lower long-term financing cost when compared to traditional debt.

However, most convertible bonds are structured as unsecured debt for the issuer, meaning that if the issuing company were to become bankrupt and default on the bond, the buyer of the bond has a lower priority claim on the company's assets, after the secured straight debt holders have been paid off. Therefore, although the possible upside gains on the convertible bond is higher than a normal bond, its default risk is also relatively higher.

Convertible bond terminology

Relevant convertible bond concepts can be separated into two categories due to its dual bond-and-equity nature:

Bond portion

  • Par Price / Par Value: Usually $1000 per bond, the par price of the convertible bond is the cash value of the bond at maturity.
  • Maturity: This is date on which the bond can be redeem for its par price. A convertible bond with a maturity longer than ten years is also known as a convertible debenture.
  • Coupon / Interest Payment: Usually given as an annual percentage, the coupon payment is the steady stream of income paid out to the holder of the bond. For example, a 3.5% convertible bond with a par price of $1000 will give $35 in coupon payments each year.

Equity option portion

  • Conversion Ratio: This gives the ratio at which a convertible bond may be converted into shares of stock. The conversion ratio is always calculated by dividing the par price of the bond with the conversion price, i.e. the price of the stock at conversion. For example, a convertible bond with par price $1000 can be converted into stock at $20/share, which means this bond has a conversion ratio of 50 ($1000 divided by $20).
  • Current Stock Price: The current stock price is used to calculate the value of the equity portion of the convertible bond. For example, if the bond's conversion price is $20/share, then the buyer of the bond will choose to convert the bond into equity if the stock is now $25/share but will hold on to the bond if the stock is below the conversion price.

Valuation of convertible bonds

The valuation of convertible bonds can be quite complex because of its dual nature as a normal bond and as an equity call option. Conceptually, the value of a convertible bond can be calculated in two steps, by first valuing the straight bond portion and then calculating the worth of the call option. A convertible bond that is exactly fair-valued should have its bond piece and equity call option piece add up to exactly its market trading price.

Useful internet resources for calculating the value of a convertible bond

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki