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Convertible bonds, sometimes also called as CVs or convertibles, are bonds that can be converted into a predetermined amount of the company’s equity at certain time during its life, usually at the discretion of the bond holder. In other words, a convertible bond gives the holder the right to convert or exchange the par amount of the bond for common shares of the issuer at some fixed ratio during a given period. The best part of convertibles is that it gives the investors the features of equity securities

Companies issue CVs to minimize negative investor interpretation of its corporate actions. When a public company chooses to issue stock, it shows a sign that the company’s share price is overvalued, as per the markets interpretation. The company may then choose to issue convertibles in order to avoid negative impression. This bond may likely to be converted into equity by its bondholders in case the company does well.

Convertibles are bonds which are legally debt securities and have a coupon payment. Just like all bonds the value of CVs depends on the credit quality of the issuer and as well as the prevailing rate of interest.

Let us understand the exchange feature of convertibles. With the help of the exchange feature it gives the right to the holder to convert the par amount of the bond for common shares in a “conversion ratio” or specified price. An example would be helpful to illustrate the above sentence. The conversion ratio might give the holder the right to convert $1,000 par amount of the convertibles of a particular corporation into its common shares at $250 per share. Hence, this conversion would said to be” four to one” or 4:1.

Now let us consider the investors perspective, the CV to him will be essential with a stock option hidden inside. This is a value added component built into it. Thus, there is a low rate of return in exchange for the value to trade the bond into stock.

About Author: Pauline Go is an online leading expert in finance industry. She also offers top quality finance tips like :

Bond Broker Phone Number And Address Directory, What is Bond Convexity, How To Invest In Stocks

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