Convertible Bonds
Convertible bonds are corporate bonds that can be converted by the holder into the common stock of the issuing company. When issued, they act just like regular corporate bonds, with a slightly lower interest rate. Convertibles provide a sort of security blanket for investors wishing to participate in the growth of a particular company they're unsure of, and by investing in convertibles, you are limiting your downside risk at the expense of limiting your upside potential.
-
Companies issue convertible bonds or debentures for two main reasons:
- To lower the coupon rate on debt.
- To delay dilution.
- One downside of convertible bonds is that the issuing company has the right to forcibly convert them.
-
Forced conversion usually occurs when the price of the stock is higher than the amount it would be if the bond were redeemed.