Convertible Bonds are the bonds which entitle its holders to convert their bonds to the share equities during a particular time span. This conversion from bond to the equity shares can be done by the holder on some pre-determined fixed ratio. When these
convertible bonds remain as a bond then they give their holders with an income which is fixed. But if these bonds are converted into the shares then the features of the bond changes to those of the equity ones.
In case of the
Convertible Bonds, the issuers would be liable to pay a coupon amount to the holder of the same. Thus, the income generated through this is of the fixed amount type. The investors in the
Convertible Bonds are entitled to receive their part of the profit before the announcement of the dividends. The current market rate of interest along with the credit position of the issuing company or corporation determines the value of the
Convertible Bonds.
These
Convertible Bonds are different from the ordinary bonds because they can be converted by the holder of the same from the bond character to the equity share of the same company. This conversion is generally done on a specified ratio known as the
Conversion Ratio. Suppose the
conversion ratio for any corporate bond is 4:1. This means that if the price of a bond is hundred dollars then after conversion the holder would be entitled to receive four equity shares for every bond converted at the individual share price of twenty five dollars per share.
But if it is seen that the conversion of the same bond given above is yielding four equity shares for every bond converted each at a price of ten dollars then it doesn't make any economic sense for the
Convertible Bonds holder to convert it. But if the same conversion rate is observed to be at the rate above the twenty five dollar mark then it would be highly recommended for them to go for the conversion. Generally, the analysis adopted by the investors in the
Convertible Bonds is known as
Breakeven Analysis.