Convertible bonds are hybrid securities with debt and equity features, offering interest payments and options to convert into stock. They come in various types, such as vanilla, mandatory, and contingent, each with unique conversion conditions. Valuation of these bonds is complex, considering both bond and stock elements. Companies like Twitter, Tesla, and Netflix have leveraged convertible bonds for capital without significant shareholder dilution, showcasing their utility in finance.
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Convertible bonds provide investors with regular interest payments like traditional bonds
Convertible bonds offer the opportunity for conversion into a set number of the issuing company's common shares
Conversion of convertible bonds can occur at specific intervals during the bond's life, usually at the discretion of the bondholder
The face value is the amount the issuer pays at maturity
The coupon rate is the interest rate paid on the face value
The conversion ratio is the number of shares that each bond can be converted into, and the conversion price is the price at which the bond can be converted into stock
Traditional convertible bonds allow for conversion into stock after a predetermined date
Mandatory convertible bonds are designed to convert into equity automatically at maturity
CoCos are triggered by specific events, such as a decline in the issuer's capital ratio below a certain level
Valuing convertible bonds is a multifaceted process that accounts for both their bond-like and equity-like characteristics
The bond value is influenced by traditional factors such as interest rates, the issuer's creditworthiness, and time to maturity
The conversion feature adds complexity, as it is affected by the underlying stock's price and volatility, and is determined by models that reflect the present value of future coupon payments and the bond's face value, adjusted for the likelihood of conversion and the potential equity upside
00
Holders of convertible bonds receive ______ payments and may convert their bonds into a predetermined number of the issuer's ______ shares.
interest
common
01
Traditional Convertible Bonds Conversion Timing
Convertible into stock after a predetermined date.
02
Mandatory Convertible Bonds Feature
Automatically convert into equity at maturity.
