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Finance: What are Convertible Bonds? 9 Views
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Description:
What are Convertible Bonds? Convertible bonds are bonds that have a provision to be converted into equity common shares at a predetermined strike price. It is a means by which an investor can hedge a downside position by receiving coupon income and a return of principal at maturity on the bond, but benefit on the upside of stock appreciation via conversion if the listed market price rises beyond the strike price.
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- Terms and Concepts / Banking
- Terms and Concepts / Bonds
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- Terms and Concepts / Derivatives
- Terms and Concepts / Forex
- Terms and Concepts / Investing
- Terms and Concepts / Managed Funds
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- Terms and Concepts / Muni Bonds
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Transcript
- 00:00
Finance a la shmoop what are convertible bonds? okay there's a joke about the
- 00:08
Inquisition in here somewhere or maybe something about Cossacks and 17th
- 00:13
century Russia what do you think animated musical or maybe a King Henry [King Henry VIII appears]
- 00:17
thing but yeah all that's different kind of conversion way more pedantically a
- 00:23
company might be having a hard time selling or issuing its bonds to Wall [Man with company briefcase for head meets man with Wall Street briefcase for a head]
Full Transcript
- 00:29
Street in order for them to close the deal with their stock trading today at
- 00:33
25 bucks a share they might say well these bonds are convertible into 20 [Man with company for a head discussing bonds]
- 00:38
shares of our stock that is they would have a single thousand dollar unit of
- 00:43
that bond and it would convert into 20 shares which would then value the shares
- 00:48
at 50 bucks either thousand divided by 20 there's 50 it's an advanced calculus
- 00:53
sorry if you didn't have it which would sort of be you know the over/under price
- 00:56
at which bondholders would start to seriously look at converting their nice
- 01:01
safe bonds into those risky pesky equities well why would a company offer
- 01:06
convertible bonds instead of you know just vanilla bonds well if they were [Man discussing convertible bonds]
- 01:12
stuck paying 6% interest on just bonds but really could only afford to pay 4%
- 01:18
well they might get the interest rate discount by throwing in that equity
- 01:23
kicker in the bonds having that convertibility feature yes they would
- 01:27
suffer dilution at 50 bucks a share but that price is double and change where
- 01:32
the stocks out here so the company is probably thinking that it wouldn't mind
- 01:36
some dilution from these bonds being converted up there in stock price right [Arrow points to stock value mark on graph]
- 01:42
and remember the bonds pay the 4% interest along the way until they are
- 01:47
converted the moment those bonds are converted into equity well then the debt
- 01:51
on the balance sheet of the company and its obligation to pay that 4% yearly [Company balance sheet and interest highlighted]
- 01:56
interest goes mercifully away they print 20 more shares for each bond converted
- 02:02
and yes those shares may pay a dividend but as far as the convertible bonds go
- 02:07
they are thereafter converted and saved and remember Jesus Saves but Moses
- 02:15
invests
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