Covertible Bonds 50:5.3

Conversion Value

"parity value" is the current share price multiplied by the conversion ratio.

Contingent Convertible Bonds (CoCos)

Bonds with contingent write-down provisions. They differ from tradition convertible bonds in that: (1) Unlike traditional convertible bonds, CoCos convert automatically upon the occurrence of a pre-specified event (2) Contingent write-down provisions are convertible on the downside + Since they set to convert automatically, they may force holders to take losses, which is why they offer investors a higher yield than otherwise similar bonds

Above

If the call provision is in this relation to the share price then the issuer may force the bondholders to covert their bonds into common shares before maturity.

Putable bonds will trade at a higher price

Relative to an otherwise similar option-free bond, a: a. Putable bonds will trade at a higher price b. Callable bond will trade at a higher price. c. Convertible bond will trade at a lower price.

Issuer

The call provision on a callable bond benefits this party; thus, requiring them to sell at a lower price.

Callable Bond

The type of bond with an embedded option that would most likely sell at a lower price than an otherwise similar bond without the embedded option is a:

I. gives the bondholder the ability to covert into equity, and participate in equity upside. II. Bondholder receives downside protection if the share price does not appreciate....thus, regular coupon payments and principal repayment at maturity.

Two (2) nice things about Convertible Bonds for the bondholders

I. reduced interest expense II. elimination of debt if option is exercised

Two advantages of convertible bonds for the issuer:

Callable

When compared with an option-free bond, which type of bond most likely offers a higher yield to maturity?

Bond price minus conversion value

Which of the following best describes a convertible bond's conversion premium? a. Bond price minus conversion value b. Par value divided b conversion price c. Current share price multiplied by conversion ratio.

Call Provision

Which of the following is a benefit to the issuer? a. Put Provision b. Call provision c. Conversion Provision

Higher yield; lower price

callable convertible securities sell at this compared to other convert. sec.

Convertible Bonds

is a hybrid security with both debt and equity features that gives the bondholder the right to exchange the bond for a specified number of common shares in the issuing company.

Conversion Ratio

is the number of common shares that each bond can be converted into. =Par Value / Conversion price

Conversion Price

is the price per share at which the convertible bond can be converted into shares

yield advantage: convertible bonds

the coupon rate on this type of bond is typically higher than the dividend yield on the underlying security.

Warrant

this is not an embedded option but rather an "attached" option

Early conversion

this would eliminate the yield advantage of continuing to hold the convertible bond; investors would typically receive in dividends less than they would receive in coupon payments.