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.
