What are Convertible Bonds?
A convertible bond is a good source of fixed-income. The
investors get interest payment until the bonds are converted
in equity shares. It is comparatively safe and provides higher
yields than common stock.
Types of Convertible Bonds
-
Vanilla Convertible
The vanilla
convertible bond
is issued with a conversion price which is the price that
the underlying stock must achieve for making the
conversion profitable. The issue of the convertibles is in
higher prices that are much higher than the underlying
stock price. If the bond is converted, the unpaid accrued
interest of the investor stands forfeited. Because of
this, investors usually wait until entitled to the next
interest payment before converting the bond into stock.
-
Embedded Options
Convertibles have a call and put option embedded over it.
A call option provides the right to the issuer to
vigorously redeem the bonds before maturity for a
pre-fixed price. The call date is often staggered across
many years after the issue date. Call options do not
appeal to investors, who need additional yield above the
yields on basic convertibles or vanilla. Put options
provide the investor the authority to sell the bond back
to the issuer at an agreeable price. This creates a floor
price on the bond which appeals to investors and thus
lowers the desired yield on the bond. Many convertible
bonds provide both options.
-
Mandatory Convertible
The mandatory convertible bonds are issued by the
companies with a particular conversion date. The bonds are
required to be converted by the investors to the
underlying stock no further than this date. These bonds
often have relatively short tenures.
-
Exchangeable Bonds
The exchangeable bonds come up with a special trait where
the underlying bond and the stock are from different
issuers. Exchangeable bonds do possess all the other
traits of convertible bonds.
-
Contingent Convertibles
These bonds must achieve a price above the conversion
price before they get converted. The required price is
often some fixed percentage above the conversion price,
and the stock must trade at the required price for a
pre-defined price before conversions are permitted.
-
Foreign Currency Convertible Bond
The denominations of these convertibles are in a currency
other than the denominations used in the issuer’s country.
This characteristic would make the bond more preferable,
because interest payments would not be based on the
exchange rate fluctuations that result in fewer dollars
per thousands of rupees.
-
Vanilla Convertible
The vanilla
convertible bond
is issued with a conversion price which is the price that
the underlying stock must achieve for making the
conversion profitable. The issue of the convertibles is in
higher prices that are much higher than the underlying
stock price. If the bond is converted, the unpaid accrued
interest of the investor stands forfeited. Because of
this, investors usually wait until entitled to the next
interest payment before converting the bond into stock.
-
Embedded Options
Convertibles have a call and put option embedded over it.
A call option provides the right to the issuer to
vigorously redeem the bonds before maturity for a
pre-fixed price. The call date is often staggered across
many years after the issue date. Call options do not
appeal to investors, who need additional yield above the
yields on basic convertibles or vanilla. Put options
provide the investor the authority to sell the bond back
to the issuer at an agreeable price. This creates a floor
price on the bond which appeals to investors and thus
lowers the desired yield on the bond. Many convertible
bonds provide both options.
-
Mandatory Convertible
The mandatory convertible bonds are issued by the
companies with a particular conversion date. The bonds are
required to be converted by the investors to the
underlying stock no further than this date. These bonds
often have relatively short tenures.
-
Exchangeable Bonds
The exchangeable bonds come up with a special trait where
the underlying bond and the stock are from different
issuers. Exchangeable bonds do possess all the other
traits of convertible bonds.
-
Contingent Convertibles
These bonds must achieve a price above the conversion
price before they get converted. The required price is
often some fixed percentage above the conversion price,
and the stock must trade at the required price for a
pre-defined price before conversions are permitted.
-
Foreign Currency Convertible Bond
The denominations of these convertibles are in a currency
other than the denominations used in the issuer’s country.
This characteristic would make the bond more preferable,
because interest payments would not be based on the
exchange rate fluctuations that result in fewer dollars
per thousands of rupees.
Features of Convertible Bonds
-
The
conversion from the bond to stock can be done at certain
times during the bond's life and is usually at the
discretion of the bondholder.
-
A
convertible bond provides the investor the option to
convert the value of the outstanding bond into equity of
the borrowing firm, on pre-specified terms.
-
Exercising this option leads to redemption of the bond
prior to maturity, and its replacement with equity.
-
The
conversion from the bond to stock can be done at certain
times during the bond's life and is usually at the
discretion of the bondholder.
-
A
convertible bond provides the investor the option to
convert the value of the outstanding bond into equity of
the borrowing firm, on pre-specified terms.
-
Exercising this option leads to redemption of the bond
prior to maturity, and its replacement with equity.
Why Invest in Convertible Bonds?
Investing in convertible bonds can be a good decision for many
investors. You earn a fixed interest until maturity on your
investment in convertible bonds. You also enjoy the stock
value appreciation benefit.
Advantages of Investing in Convertible Bonds
Higher Yields
Convertible Bonds in India is generally considered
for higher yields. The Convertible bonds yields in
comparison to common stocks is high. Also, it
provides a fixed income in the form of interest.
Risk Level
The level of risk involved in convertible
BondsIndia is less. In case the issuing company is
required to go for liquidation, the bondholders
are given the first preference. This, minimizes
the risk of default and guarantees your investment
to a certain level.
Dual Benefits
An investor holding a convertible bond gets dual
benefits. Apart from earning a fixed interest
income as a bondholder he or she can get the bonds
converted into equity shares if the company
performs well.
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Advantages of Investing in Convertible Bonds
Higher Yields
Convertible Bonds in India is generally considered for
higher yields. The Convertible bonds yields in
comparison to common stocks is high. Also, it provides
a fixed income in the form of interest.
Risk Level
The level of risk involved in convertible BondsIndia
is less. In case the issuing company is required to go
for liquidation, the bondholders are given the first
preference. This, minimizes the risk of default and
guarantees your investment to a certain level.
Dual Benefits
An investor holding a convertible bond gets dual
benefits. Apart from earning a fixed interest income
as a bondholder he or she can get the bonds converted
into equity shares if the company performs well.
Who Should Invest in Convertible Bonds?
Investing in Convertible Bonds is a good option for investors
looking for fixed interest rate and the flexibility to convert
the bonds into equity at the time the company starts
performing well. The default risk in Convertible debt is
minimal.
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