Definition:
Bond conversion is the process of exchanging a convertible bond for common stock of the issuing company. A convertible bond is a type of bond that gives the bondholder the option to convert the bond into common stock at a predetermined conversion price.
Key points about bond conversion:
- Convertible bond: A convertible bond is a bond that can be converted into common stock.
- Conversion price: The conversion price is the predetermined price at which the bond can be converted into common stock.
- Conversion ratio: The conversion ratio specifies the number of common shares that can be obtained for each bond.
- Call provision: Some convertible bonds have a call provision, which allows the issuer to call the bond for redemption before maturity.
- Conversion premium: The conversion premium is the difference between the market price of the convertible bond and the conversion value of the underlying common stock.
Why do investors choose to convert bonds?
- Capital appreciation: If the price of the common stock rises above the conversion price, investors can profit by converting their bonds into shares.
- Dividend payments: Investors may also receive dividend payments on the common stock after conversion.
- Risk management: Convertible bonds offer a combination of debt and equity features, which can help investors manage risk.
However, it’s important to note that converting a bond can result in a loss if the market price of the common stock is below the conversion price.
In essence, bond conversion is the process of exchanging a convertible bond for common stock of the issuing company, and it’s a feature that can provide investors with potential upside if the stock price rises.
