A convertible bond is one where the bondholder can convert their bond into shares of common stock of the company. This feature gives the investor the chance to own stock in the company at any point they wish.
A benefit to this type of debt security is if interest rates rise, bond prices go down - but convertible issues tend to trade closer to par because of the conversion feature.
Each bondholder can convert based on a fixed conversion price and the par value amount of bonds they own. If an investor owns a $1000 bond and the conversion price is $50, they could own 20 shares of stock in that company (1000 divided by 50).
The value and timing of this switch could be based on the market value of the bond to sell as is and the value of the common stock in the market.
If the stock price is higher (including the shares that could be owned) against the bond, then converting may be a good option at a given time.
These debt investments are dynamic bonds and can add income and versatility to most portfolios.
Post here on blog for feedback or questions.
http://www.brokerjobs.com/convertiblebond.htm
2 comments:
Parity is when the stock value and the bond value ar equal. If a bond is trading at $1200 and the conversion price is 40, the shares would work out to 25 (1000 divided by 40). For the stock to be trading at parity with the $1200 bond, it would need to trade at 48.
A stock at 48 multiplied by the conversion ratio of 25 would be parity to $1200.
Convertible Bonds
In an arbitrage, a trader buys the lower price security and simultaneously sells the equivalent higher priced security to lock in the profit before someone else does.
Convertible Bonds
Post a Comment