Convertible bond
from class:
Financial Accounting I
Definition
A convertible bond is a type of bond that can be converted into a predetermined number of shares of the issuing company's stock. It combines features of both debt and equity, offering fixed interest payments with the potential for capital appreciation.
5 Must Know Facts For Your Next Test
- Convertible bonds typically offer lower interest rates compared to non-convertible bonds due to the added conversion feature.
- The conversion ratio determines how many shares of stock each bond can be converted into.
- Conversion price is the price at which the bond can be converted into stock, usually set higher than the current stock price at issuance.
- Convertible bonds provide a hedge against inflation since they can appreciate in value if the company's stock performs well.
- These bonds can be advantageous for companies as they may reduce interest expense and delay dilution of equity.
Review Questions
- What is the primary benefit for an investor holding a convertible bond?
- How does the conversion ratio affect a convertible bond?
- Why might a company choose to issue convertible bonds instead of regular bonds?
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