2.9.4 Convertible Debentures

Question 1

What are convertible bonds?

Answer 1

They are bonds that can be converted into shares of preferred or more often common stock at a fixed conversion ratio which is stipulated in the indenture.

Question 2

How does the convertible feature of debentures helps the issuing companies?

Answer 2

Issuers are able to pay lower yields on debt – because they are offering the convertible option– and to raise equity capital without a public equity offering

Question 3

Convertible debentures are usually offered as subordinated debt. What does this mean?

Answer 3

This means they have lower repayment status than other debt securities if the issuer goes bankrupt.

Question 4

What are two distinct advantages of the convertible debentures for the issuer, assuming the company flourishes?

Answer 4

1) They raise equity capital now at prices that reflect expected future performance
2) They raise Equity capital without deflating the current price of stock the way a new stock issue would.

Question 5

How does the convertible debentures help the company if it flounders?

Answer 5

If the company flounders, stockholders are unlikely to convert so convertible to provide the company with borrowed money at substantially lower interest rates.

Question 6

What are the benefits of the convertible bond to the investor?

Answer 6

1) It has a lower level of volatility and a higher degree of safety than the underlying common stock.
2) At the same time, it allows the investor to benefit from a company’s profitable performance, just like a stockholder.
3) Most long-term convertible bonds have put options, allowing the investor to force the issuer to buy back the bond before its maturity date at a specified price.