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What are Convertible bonds?

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Published: Monday, March 5, 2012, 14:39 [IST]

What are Convertible bonds?

As the name indicates convertible bonds are the bonds which can be converted into equity shares as per the discretion of the holder. Here holder has the option to convert into shares of the issuing company at an agreed upon price. Convertible bonds are like hybrid security with debt and equity.

Convertible bonds usually earn lower interest rate than other bonds as the price of the bonds rise along with the underlying stock. The bonds are beneficial when markets are bullish, but it pays interest if the underlying stock do not rise.

Conversion ratio: This is the ratio to determine the number of shares the bond holder will receive per bond they exchange.

Benefits: The benefits for the issuing company is that if the bonds are converted to stocks, debt obligation becomes zero.

For investors it can acts as a safe investment when compared to investing in common stocks as these stocks are less volatile.

Disadvantages: The main disadvantage of convertible bonds are that it runs the risk of diluting equity and also control of the company. This may not be a major concern for big companies but it definitely effects the smaller companies.

These bonds can be disadvantages to the investors as bond holder will be receiving comparatively lower yield in maturity. This is major concern only when the issuer's equity are not in upward price projections.

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