Convertible Bond

In the financial world, a convertible bond, sometimes called convertible note or convertible bond, is a kind of equity bond wherein the holder may convert to a specified quantity of shares of a particular stock in the issuer or into cash of equivalent value. It's a hybrid financial product with equity-like characteristics. However, note holders are not entitled to vote. They have no say in determining the company's shares as they are not actual equity shareholders. This makes it different from conventional bonds where holders decide what stocks go where.

A convertible bond normally issues a lower return on equity than most conventional equities because of the lower face value. This is because a convertible bond is "call" option-like in nature. The holder may convert his bond into shares of stock or cash by paying the purchase price plus a conversion fee. Alternatively, he can also sell the bond for a profit.

The face value on a convertible bond is usually set at a lower amount. The price is typically determined by a formula. The valuation of the company's stock or equity is used as the factor determining the face value of the bond. The greater the equity, the higher the premium.

In addition, there are many factors affecting the marketability of these kinds of corporate bonds. One factor is the current stock price. These bonds are often referred to as "long-term bonds." Companies that issue them to raise money usually want to raise money within a year or less because the maturity date could be quite far off. Hence, the company issuing them might prefer to obtain a small amount of capital at one go rather than having the money tied up for a long time.

Investors in convertible bond issues also need to consider the risk involved. This comes from how the interest payments are fixed and not affected by the market conditions. A convertible bond's face value may not change even if the value of the stock or other underlying securities does. The only way for investors to make money is if they sell the face value of the bond at a higher price than the coupon rate.

There are a few things that help an investor decide whether a convertible bond is worth investing in. One important consideration is the conversion price. This refers to the amount of money an investor will receive upon selling the bond. Sometimes, the conversion price is determined using an appraisal formula. Sometimes, the value of the underlying securities determines the conversion price.

Another factor that investors should look into is the conversion ratio, also referred to as the share conversion ratio. This refers to the number of shares out of each whole unit of a stock or bond. The higher this figure is, the more desirable the bond is for an investor. However, this is also a very difficult to determine, especially for common stocks or securities that are highly correlated to the overall market prices.

There are a couple other factors that should be considered when getting into convertible bond issues. First, there are mandated convertible bond issues and then there are preferred issues. Mandated convertible bond issues are ones where the issuer or company must request the government for the conversion ratio. Preferred issues are ones where the issuer or company does not have to request the government. In general, preferred issues are easier to obtain than mandated issues. Lastly, convertible bonds come in two types, namely, common equity and preferred stock.

A convertible bond is usually seen as a particularly safe form of debt security, because it converts automatically from a variable to a fixed-income and back again. For instance, if an investor buys a convertible bond that has a 5% coupon at a certain point in time, he can convert it into a common bond with a lower coupon. This will allow him to pocket the difference between the original interest payments and the newly converted, fixed-income interest payments. As a result, he will be able to continue paying the same amount each month until his investment is depleted. However, convertible bond interests will be less than those of a debt security with a higher coupon, especially if the company's assets do not cover the conversion.

Hybrid securities refer to convertible bond issues that are convertible between two different forms of payment. There are some hybrid securities that allow investors to convert between either debt payments or equity payments, depending on their preference. These include a fixed-rate hybrid security and an interest only hybrid security. Some hybrid securities combine the features of both debt and equity options for convenience to suit individual investors.

Because convertible bonds are used as a popular method of hedging risk by investors, they can be purchased from a number of different sources. Some popular sources include financial institutions, money managers and banks. Broker dealers often offer convertible bond deals, as do investment companies. It is possible for private investors to purchase convertible bonds, but the deals tend to be more expensive because of the lack of institutional investment.