PRESENTED BY ,
G.Harshini
Janupriya
S.Anukarthika
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1/16/16
Convertible bond
A convertible bond or convertible note
or convertible debt is a type of bond that
the holder can convert into a specified
number of shares of common stock in the
issuing company or cash of equal value.
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1/16/16
Call provisions
Call provisions
Convertible valuation as a stock plus method
Think stock with higher yield
Conversion value=stock price * conversion factor
Zero coupon bonds with options
Valuation of zero coupon bonds
Mandatory convertible
High dividend yield and a cap
EXAMPLE: PERCS, DECS
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1/16/16
Put options to hedge the credit risk of CBs-
bearish hedge
High loss when the stock price moves up
sharply
Convertible asset swap
Synthetically separates the fixed income
component and equity
Repurchase facility
Trader to a broker – broker to a bond buyer
Bond buyer floating rate and broker has the
fixed rate
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1/16/16
Convertible bond CDS
Manage the credit risk of CBs
Transferring the credit risk to the swap
seller for specified time period
Is like a insurance policy against specified
issue
Put option
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1/16/16
Why CB may be called back by the
issuer?
Refinance at lower rate or deep in the
money
Most companies force conversion
What happens if parity falls below the call
price?
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1/16/16
Convertible Bonds
A derivative product
Standard Corporate bond with an option
Sensitive to interest rate & volatility of
underlying equity
Worth of CB
- At the minimum of non- convertible bonds
- Coupon on CB is higher than dividend on
shares
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1/16/16
Why to Issue CB?
Reduce dilution
To lower the coupon rate on debt
Raises the price of share, sold at premium to
current price
• Why investors need to buy CB?
Lowers risk
Higher yield than share dividend
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1/16/16
Conversion ratio & Conversion price
Conversion Ratio- No of shares that each
bond
can be converted
Eg: If the conversion price is $100
Then, Conversion Ratio = Par value of the
bond/
Conversion Price
= 1000/100 = 10
CR & CP- can be changed (Stock splits &
stock dividends)
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1/16/16
Conversion parity
Relationship between (stock price *conversion factor)
and bond price
If Bond price = $1200, CR = 10 , Share price= $120
-> at parity
If Bond price = $1200, CR = 10 , Share price= $100