Convertible Bonds Flashcards
What are convertible debentures
Bonds that can be converted, at the option of the owner, into common stock of the issuer.
What are some advantages to the issuer of convertible bonds
Increased marketability, lower coupon rates, and if converted replaces obligation to pay interest with potential to pay dividends. (Which is not required)
How do you find the conversion rate
Divide par value by conversion price
How do you find the conversion price
Divide par value by conversion rate
What do you need to know on a conversion question
The price of the bond. The price of the common stock. How many shares pf common stock can I get from the conversion.
What is the parity price
Price at which the bond value and converted shares of stock are equal in value.
Explain arbitrage
A trader buys the lower price security and simultaneously sells the equivalent higher priced security to lock in the profit before anyone else does.
