Convertible bond lower coupon rate

And given a low-interest rate environment, the principal protection isn't worth as much as it might otherwise be.

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  • How convertible bonds work.
  • Definition.

Convertible bonds are rather complex securities for a few reasons. First, they have the characteristics of both bonds and stocks, confusing investors right off the bat. Then you have to weigh in the factors affecting their price. These factors are a mixture of what is happening in the interest-rate climate, which affects bond pricing, and the market for the underlying stock, which affects the price of the stock.


Then there's the fact that these bonds can be called by the issuer at a certain price that insulates the issuer from any dramatic spike in the share price. All of these factors are important when pricing convertibles.

However, there is usually a cap on the amount the stock can appreciate through the issuer's callable provision. This means while convertible bonds limit the risk if the stock price plummets, they also limit exposure to upside price movement if the common stock soars. Getting caught up in all the details and intricacies of convertible bonds can make them appear more complex than they really are. Convertible Notes. Advanced Options Trading Concepts. Fixed Income Essentials. Dividend Stocks.

Conversion price

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An Introduction to Convertible Bonds

What Is a Convertible Bond? We have solutions for your book! How can you reconcile the arguments made by Todd and Mark?

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Calculate the Coupon Rate of a Bond

Chapter , Problem is solved. View a sample solution. View a full sample. Alternate ISBN: , , Get more help from Chegg. You have no voting rights. You merely lend a corporation your money, for its purposes, in exchange for monthly payments of interest on what they borrow from you, and full payment at a bond's maturity of the amount they borrowed from you when you purchased their bond. A convertible bond is similar to a regular corporate bond.

It pays a coupon - monthly interest - and pays the face or "par" value at maturity.

An Introduction to Convertible Bonds

But, because it can be changed into something else - investment in, rather than lending to, a corporation - the interest rate offered on a convertible bond is frequently less than a straight, nonconvertible corporate bond. A convertible bond acts more like a bond than a stock until or unless the bond holder - lender - or the issuer chooses to convert it into stock or share ownership. A convertible bond is a corporate bond that an investor can convert into a set number of shares of a corporation, giving the holder after conversion the same rights as any shareholder.

There are a pair of factors that go into a considering whether to invest in a convertible bond. The conversion price is the share price at which the convertible bond can be converted into common stock. Upon issuance, the conversion price is usually set, and the bonds themselves are usually issued when the current price of the underlying stock is below that of the conversion price.

The amount by which the price of the stock is below the conversion price is called the conversion premium.