The transformation of convertible bonds into shares of stock is usually done at the bondholder's discretion. Sometimes, the trigger on a convertible bond is share price performance. In those cases, the bonds convert automatically as soon as the company's stock reaches a set price.

Investors have the option of turning convertible bonds into shares of the issuer's common stock at a set price and typically by a set date.

Discretionary Bond Conversion

Convertible bonds are issued by companies as a way to raise money while paying lower interest rates than traditional business loans. Holders can then convert the bonds to stocks when they feel it is more profitable to hold a stock than a bond.

Forced Bond Conversion

A company might issue a bond with a right to redeem or call a convertible bond. The bond's prospectus will usually explain the terms of any such forced conversion call feature.

By using these issuances, a company can force the conversion of convertible bonds to stocks at a time that is most advantageous. A company will often force a conversion when the price of the stock approaches the bond's conversion price. This means the bonds can be retired without requiring any cash payout by the issuer.

Why Do Companies Issue Convertible Bonds?

Issuing convertible bonds can be a flexible financing option for companies. They tend to be more useful for companies with high risk/reward profiles. Such firms often issue convertibles to pay lower interest rates on their debt. Investors will generally accept a lower 澳洲幸运5开奖号码历史查询:coupon rate on a convertible bond than an otherwise identical regular bond because of its conversion feature. For example, Amazon was able to obtain a 4.75% interest rate on convertible bonds in 1999.

Companies with weak credit ratings that expect their earnings and share prices to grow substantially within a specific time per𓂃iod also tend to favor convertible bonds.

Convertible Bonds Considerations

The stocks that convertible bondholders get when they convert their bonds come in the♏ form of newly issued securities, which can harm previous investors. In the absence of protections, convertible bonds almost always dilute the ownership percentage of current shareholders🔯.

The result is that stockholders own a smaller piece of the pie after bondholders convert their holdings. For example, Carnival Corp. (CCL) issued some 澳洲幸运5开奖号码历史查询:zero-coupon convertible bonds in 2003 that automatically turned into stock if Carnival's share price hit $33.77. According to the terms of the 澳洲幸运5开奖号码历史查询:indenture, convertible bondholders would be allowed to buy the company's stock at $30.70 per share. The bonds did not offer coupons, so investors needed a sweetener. The $3.07 difference between the market price and the conversion price of the bonds provided it. Unfortunately for stockholders who didn't own them, the bonds converted to over 17 million shares. That made for a highly di꧅lutive conversion and negatively impacted existing shareho🤪lders.

Moreover, convertible bonds with the best conversion features usually go to investors who already have financing relationships with issuing companies. Some of these preferred features include low conversion prices, preferential conversion ratio𓆏s, a𝐆nd higher interest rates.

There is also the possibility that holders of convertible bonds may not want common stock at the time of a forced conver🃏sion. For coupon bonds, they could prefer to continue getting an income stream from the coupons. The bondholders might also wan🦂t to convert to shares at an even higher price.

The Bottom Line

Convertible bonds can usually be convert🌟ed by the holders at their discretion, usually to their benefit, or by the issuer under forced terms. 🌄Forced conversions rarely benefit the convertible bond holders.