Global Convertible Bonds | RBC Global Asset Management (2024)

FAQs

What are global convertible bonds? ›

Convertible bonds offer the potential for equity-like returns but with lower volatility, combined with the security and capital protection characteristics provided by a bond investment. We believe an allocation to convertibles can enhance your portfolio's risk/reward characteristics.

Calculating the Conversion Price of Convertible Bonds

The calculation of the conversion price is relatively straightforward. It is calculated by dividing the bond's face value by the conversion ratio. The conversion ratio specifies the number of shares that a bondholder will receive upon conversion.

Convertible bonds give investors the option to convert the bond to common stock at their discretion. As a result, convertible bonds offer higher returns than common stock but lower returns than non-convertible corporate bonds. Corporate bonds are essentially IOUs. Investors lend money to a company, which issues a bond.

The valuation of a convertible bond is made more difficult due to the underlying characteristics. When pricing, one must consider the underlying bond and equity details. For example, the equity price, maturity, coupon, volatility and spread must all be considered.

Examples of Convertible Bonds

The current stock price is $25 per share. After a period of high profits and good publicity, the stock's price is now at $40 per share. The investor can take the bond and convert it into fifty shares of stock for a value of $2,000 ($40 per share times 50 shares).

Investors are often attracted to convertibles' reduced vulnerability to interest rate moves. The equity characteristics of convertible bonds have made them less susceptible to rising interest rates than non-convertible bonds. Many investors may welcome the reduced duration risk of shorter maturities as well.

A convertible bond is a bond with an embedded derivative that allows for the 'conversion' of the bond into equity. This conversion is at the choice of the bond investor. If the bond is converted, the bondholder would typically receive equity (in the form of shares) or cash equivalent to the share's market value.

Like other bonds, convertible bonds are considered debt. In exchange for the use of investor funds, the company agrees to pay the investor a set rate of interest referred to as the coupon rate. Unlike other bonds, convertibles also give the holder the right to convert the bond into shares of stock.

Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond's conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.

In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) 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.

Can convertible bonds be converted at any time? ›

Typically, a convertible security is a bond that can be exchanged or converted into a specific number of shares of the issuer's common stock. The conversion ratio is determined at the time of issuance, and typically can be acted upon by the holder at any time.

Used wisely, a policy of selling differentiated securities (including convertible bonds) to take advantage of market conditions can lower a company's overall cost of capital below what it would be if it issued only one class of debt and common stock.

To accomplish convertible bond valuations, investors may rely on the following formula: Value of convertible bond = independent value of straight bond + independent value of conversion option.

Companies with a low credit rating and high growth potential often issue convertible bonds.

The minimum price of a convertible bond is the greater of its conversion value and its straight value. Market conversion premium per share = market conversion price - current market price = 9 - 5 = $4 per share.

Convertible bonds are corporate bonds that can be exchanged for common stock in the issuing company. Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond's conversion ratio determines how many shares an investor will get for it.

International bonds are a great way to diversify a portfolio as the investor can gain exposure to foreign securities that may not necessarily move in tandem with securities trading on local markets.

A foreign currency convertible bond (FCCB) is a convertible bond that is issued in a foreign currency, which means the principal repayment and periodic coupon payments will be made in a foreign currency. For example, an American listed company that issues a bond in India in rupees has, in effect, issued an FCCB.