Disadvantages of Convertible Bonds Convertible bonds are callable, meaning that the issuer can force investors to convert. A bond may be issued with a specified call date or the company may call the bond and force conversion if the stock price rises beyond a particular point. Therefore, the upside potential of the investment may be limited. Convertible bonds are highly correlated to equity markets, meaning their values may be more associated with movements in the stock market than other types of bonds.
Convertibles are sensitive to rising interest rates, although to a lesser degree than plain old corporate bonds. Convertible bondholders are paid a lower coupon rate than corporate bondholders. If many convertible bondholders exercise the conversion option, dilution may occur with attendant negative effects on stock price. Companies that issue convertibles may have weaker credit ratings Convertible bonds are of lower priority than straight bonds in the event of default and are unsecured, meaning if a company goes bankrupt, you may not be repaid the amount you lent them.
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Measure content performance. Develop and improve products. List of Partners vendors. Convertible bonds are typically issued by companies that have high expectations for growth and less-than-stellar credit ratings.
The companies get access to money for expansion at a lower cost than they would have to pay for conventional bonds. Investors, in turn, get the flexibility of turning their convertible bonds into cash or stock shares. A startup company with little current revenue and rapid growth potential might be an ideal candidate for issuing a convertible bond. A convertible bond is a hybrid security that has some features of both a bond and a stock share.
It pays interest at a set rate at specified intervals. But, it can be converted to either cash or a specified number of common shares when it matures. The conversion option is available at pre-set times during the life of the bond. Convertible bonds generally have a lower rate of return than conventional bonds. They appeal to investors who like the option of exploiting an increase in the stock's price or taking the cash, depending on which is the better deal when the bond matures.
The terms of the bond establish its conversion ratio. That is, the bond may be convertible to four or five shares of the company's common stock. That would be a conversion ratio of or Convertible bonds are an appealing option for corporations as well. They can set the rates of return a bit lower than conventional bonds.
And, when the convertible bonds mature, some of them will be repaid in stock rather than cash. There's yet another bonus for the company: The interest on convertible bonds is tax-deductible. Corporations like convertible bonds because they lower their cost of capital. It's a cheap way to borrow money to improve the business. Nevertheless, there is a drawback. If many or most of the convertible bond holders convert to stock shares, the company's shares in the market will be diluted.
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