Monday, October 25, 2010

Bond Type: Convertible Bonds




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Issuers which listed shares can issue convertible bonds. The motivation behind issuing such a facility is to piggy-back on the share price performance of the issuer. If planned correctly, issuer need not pay back the bonds as bond holders will see better value in converting it into shares than redeeming it at nominal or face value.

The risks to both issuers as well as the bond holders are as follows:

1.For the issuer, there is a very strong possibility of share dilution. There is an opportunity for new shareholders to enter the company.
 
2.Due to the convertibility factor, an overestimation of the company’s share price performance may caused the investors to overpay for the bonds.
 
3.The volatility of the equity markets can caused similar volatility in the shares of the bonds. Generally, the volatility of bond market is less than the equity market (hence the lower returns).

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