Convertible bond

PRESENTED BY ,
G.Harshini
Janupriya
S.Anukarthika
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Convertible bond
A convertible bondorconvertiblenote

orconvertibledebt is a type ofbondthat

the holder can convert into a specified
number of shares of common stock in the
issuing company or cash of equal value.

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Call provisions
Call provisions
Convertible valuation as a stock plus method
Think stock with higher yield

Conversion value=stock price * conversion factor

Zero coupon bonds with options
Valuation of zero coupon bonds
Mandatory convertible
High dividend yield and a cap
EXAMPLE: PERCS, DECS

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Put options to hedge the credit risk of CBs-

bearish hedge
High loss when the stock price moves up

sharply
Convertible asset swap
Synthetically separates the fixed income

component and equity

Repurchase facility
Trader to a broker broker to a bond buyer
Bond buyer floating rate and broker has the
fixed rate
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Convertible bond CDS

Manage the credit risk of CBs
Transferring the credit risk to the swap

seller for specified time period

Is like a insurance policy against specified
issue
Put option

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Why CB may be called back by the

issuer?
Refinance at lower rate or deep in the

money
Most companies force conversion
What happens if parity falls below the call
price?

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Convertible Bonds
A derivative product
Standard Corporate bond with an option
Sensitive to interest rate & volatility of

underlying equity
Worth of CB
- At the minimum of non- convertible bonds
- Coupon on CB is higher than dividend on
shares

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Why to Issue CB?

Reduce dilution
To lower the coupon rate on debt
Raises the price of share, sold at premium to

current price

Why investors need to buy CB?

Lowers risk
Higher yield than share dividend
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Conversion ratio & Conversion price

Conversion Ratio- No of shares that each
bond
can be converted
Eg: If the conversion price is $100
Then, Conversion Ratio = Par value of the
bond/
Conversion Price
= 1000/100 = 10
CR & CP- can be changed (Stock splits &
stock dividends)
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Conversion parity
Relationship between (stock price *conversion factor)

and bond price

If Bond price = $1200, CR = 10 , Share price= $120
-> at parity
If Bond price = $1200, CR = 10 , Share price= $100

-> below parity

If Bond price = $1200, CR = 10 , Share price= $130

-> above parity

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Conversion Premium
Usually CBs are bought at higher price than

conversion value

Eg: Conversion Premium = 1200-(10*100) =

$200
Premium paid- to limit the downside risk of CB
Investors usually Buy CBs and short

underlying asset
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Types of CB
Callable CB
Allows the issuer to buy back the bond

Puttable CB
Investor can sell to issuer; put option raises the

value of CB
Resettable CB
Conversion ratio can be reset based on average

price of underlying asset

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