Convertible bonds Bond instruments with equity-linked features
Bond instruments with equity-linked features
Convertible bonds as an asset class o Equity and fixed income perspectives o Convexity ratio o Embedded features Investors conversion right -equity participation Issuer's call right: delayed equity financing Investors put rig principal and coupons protection o Busted convertibles seeking Investment opportunities in recovery period Convertible bonds
Slide: 2 Equity and fixed income perspectives Convexity ratio Embedded features - Investor’s conversion right – equity participation - Issuer’s call right: delayed equity financing - Investor’s put right – principal and coupons protection Busted convertibles - seeking investment opportunities in recovery period Convertible bonds
o Equity perspective on convertibles To take advantage of the upside potential growth of the underlying stock(participation into equity) Swapping the variable stock dividends in return for fixed coupon payments until the earlier of the maturity date and the conversion date o Fixed income perspective on convertibles Provides the bond floor?" value Conversion option that allows the investor to exchange the bond for fixed number of shares Convertible bonds
Slide: 3 Equity perspective on convertibles • To take advantage of the upside potential growth of the underlying stock (participation into equity). • Swapping the variable stock dividends in return for fixed coupon payments until the earlier of the maturity date and the conversion date. Fixed income perspective on convertibles • Provides the “bond floor” value. • Conversion option that allows the investor to exchange the bond for fixed number of shares. Convertible bonds
Combination of bonds and equities bond plus a conversion option Bondholder has the right to convert the bond into common shares at some contractual price (conversion number may change over time) Holder's perspective: take advantage of the future potential growth of issuer s company Issuer's perspective: raise capital at a lower cost by the provision of conversion privilege to bondholders Convertible bonds
Slide: 4 Bondholder has the right to convert the bond into common shares at some contractual price (conversion number may change over time). Holder’s perspective: take advantage of the future potential growth of issuer’s company Issuer’s perspective: raise capital at a lower cost by the provision of conversion privilege to bondholders Convertible bonds
Combination of bonds and equities bond plus a conversion option convertible bond price conversion premium conversion value straight bond value cock pric Convertible bonds
Slide: 5 convertible bond price conversion premium conversion value straight bond value stock price Convertible bonds