John Said:

What is the structure of convertible bonds?

We Answered:

Basically, convertible bonds are financial instruments that represent debt. The lender has the option to receive payment of the debt in cash at the end of the term, or to convert the debt to shares of the company instead.

Things you need to figure out to come up with a structure:
- Par value of each bond
- What will be the price of the bond
- What will be the interest on the bond
- What is the conversion rate of bonds to shares = this means you set a conversion price per share or the number of shares you can get for a bond
- When will you allow bonds to be converted

Jeffery Said:

What are the benefits to company to issue convertible notes or preferred stocks?

We Answered:

Most preferred shares provide no voting rights associated with them. So they can manage the corp freely and don't fear being fired if fali to deliver.
Preferred shares normally carry a call provision, enabling the issuing corporation to repurchase the share at its (usually limited) discretion.
Preferred shares, like other legal arrangements, may specify nearly any right conceivable. Some corporations contain provisions in their charters authorizing the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued. These "blank check" preferred shares are often used as takeover defense (poison pill).These shares may be assigned very high liquidation value that must be redeemed in the event of a change of control or may have enormous supervoting powers.


Now relating convertible bonds.. the overall benefit to the corp is having a lower interest rate, than with a regular deventure or subodinated deventure bond. This is due to the fact that it offers the investor to gain a capital gains of the company performs well and they stock price goes up. They can convert the bonds into shares of stock which are liquidated at a prefix rate, that is set at the begining of teh agreement.

Jimmy Said:

How to you calculate the maximum gain and loss in a convertible bonds transaction?

We Answered:

Convertibles are hard because its an illiquid market, but like anything else, it is a market so you should be able to get a market quote from one of the dealers or brokerages out there.

Since Convertible Bonds are part stock and part bond, you kind of have to take into consideration the value of both for that company (if the stock is taking off, so will your conv bond, if not vice versa). and you also get a coupon, so in your return calculations figure out coupons since they are paying you cash.

good luck! convertibles are a great asset class, but because the market is dominated by institutions, its hard to get information and pricing. if you like them, take a look at some of the convertible funds out there.

Frances Said:

please, explain to me why anyone would ever buy a REVERSE convertible bond?

We Answered:

The market will price such a bond at its fair value, taking into account the interest paid on the bond *and* the risk of an early unfavourable conversion. Obviously the fair value will be lower for such a bond, than for one which has the same characteristics apart from the early conversion possibility.

Julie Said:

Convertible Bonds: What happens to accrued int when you convert?

We Answered:

Normally the price of the bond will include the coupon payment, therefore when you sell it you are in fact receiving the coupon back as capital if you decide to sell before the coupon date.

Usually, as the coupon payment is included in the price, you will have already factored this in to whether it is profitable to convert. Example would be if you owned 1 bond which could be converted for 10 shares and paid a 10% p/a coupon that redeemed in one year.
If the Bond is worth 100 then you would not convert if the shares were worth less than 11 (10x10 for the stock plus 1 for the coupon) Obviously there are many permutations but for what would be a profitable trade but if the share price went to 20 then you would be much better off converting the bond and forgoing the accrued interest. Also note that interest is subject to more tax laws than capital so most investors, particularly offshore, will be more willing to forgo the interest in return for capital for tax reasons.

So in most cases you will not receive the coupon if you convert the bond although the only way to know for sure is to check the prospectus of the bond you own.

Kyle Said:

A bond selling @ '120' is convertible in 2 common @ 40. The stock's selling @ 50. The bond parity price is 125?

We Answered:

So to start: Parity is when the value stock is equivalent to the market value of the convertible security.

Figure out the conversion ratio= Par Value/Conversion Price
Par= $1000 (100)
Conversion Price= $40
$1000/$40 = 25:1

Which means for every bond if you convert it you would get 25 shares of stock.

Parity price of the Bond = Conversion Ratio x Stock Market's Price (stock)
$50 x 25:1= $1250 (125)

In order for the bond to be equal to the stock, it must trade for 125 or $1250.

The price you would pay would be $40, which means its only valuable to you to convert the bond to stock and sell your stock if the stock is trading above the parity price.

Consider it like this: A case of beer has 24 individual beer...so as a package its like a Bond . If you could buy the case for $72 then that is a per unit price of $3 (parity price). Well if the market value per unit (stock) goes to $5, and case is $80 (bond) would you break
the case up (convert) and sell it individually, or would you sell the case of beer whole.