A convertible bond is a debt instrument that holders can convert into a fixed number of shares at a specified price before maturity. For example, if the par value of the convertible bond was $100 and the specified price was $50, the holder could get two shares for every convertible bond. This equity option makes the convertible bond more desirable to investors, thus a company can issue a convertible bond at a lower interest rate. Put simply, when the specified price for the stock is substantially below market levels, the convertible bond holder will choose to convert the bond into shares. But if the stock price remains below the specified price, the convertible bond holder keeps the bond and continues to collect interest. Note, however, that a convertible bond is usually callable by the issuer for early redemption, which shortens the period in which investors can choose to convert or accept the callable amount. The convertible bond, as a hybrid of debt and equity, raises numerous accounting issues, including its balance-sheet valuation and classification, and its impact on per-share earnings. |
