Convertible Bonds

Convertible Bonds are debt Securities that can be converted into a predetermined number of the issuer’s Equity Shares, usually at the bondholder’s discretion. This hybrid financial instrument offers features of both Bonds and Stocks, providing the bondholder with regular interest payments while also giving the potential for Capital-appreciation/">Capital Appreciation through conversion into Equity.

Examples:

• A company issues a $1,000 convertible bond with a 5% Coupon Rate and a conversion price of $50. If the company’s Stock rises to $70, the bondholder can convert the bond into 20 Shares of Stock (1,000 / 50).
• A tech startup issues convertible Bonds to raise Capital. Investors receive 6% interest and can convert their Bonds into Equity during a future funding round at a fixed valuation.

Cases:

• Case 1: A well-established company issues convertible Bonds. As the company’s Stock price increases, more bondholders opt for conversion, diluting existing Shareholder/">Shareholders but allowing the company to reduce debt.
• Case 2: A startup struggling to maintain Cash Flow faces declining Stock prices. Bondholders may choose to hold the Bonds for interest rather than convert, allowing the company to preserve Equity until a better market condition arises.