Convertible bond is a bond that gives investors an option to convert their bond into a stated number of shares of a firm’s common share in later date. (Madura, 2016) Convertible bond also known as a hybrid security because it has some characteristic of fixes income securities and some features of stock due to the conversion feature. Convertible bond is a regular interest paying bond and some convertible bond are combined with a call option. Calling the bond is usually a method of compel it changing. There are three components must be considered when calculated the value of convertible bond which are straight bond value, conversion value and option value. (Hauswald, 2016) Figure 1 show that the graph of value of convertible bond against the
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Therefore, reason of issued convertible bond is firm developed high risks project or operation and there are also firm with substandard credit ratings and high expected growth issued convertible bond. Example, Tesla issued $3.3 billion of convertible bonds on March 2016 due to its high-risk project and its bond has a Standard & Poor’s rating of B-. (Tchir, 2017) A bond with a low bond rating can be indicated that it is more risky than other bonds such A, AA and AAA rating bonds because the bond may default easily. Bond ratings are important because it affect the interest rate that company pay to their issued bonds. Normally, the risky bond will have high coupon rate to attract the investors but convertible bond carries a lower coupon rate compare to its similar bond which is non-convertible bond due to its conversion features. As we know that, bond price and the yield have an inversely relationship. Thus, bond price of convertible bond is higher than other bond because of convertible bond carries a low yield. If market interest rate decreases then the price of convertible bond will be …show more content…
For instance, par value of convertible bond is $1000 and its conversion price is $50 so the conversion ratio is 20. This stated that bondholder can receive 20 common shares for each bond exchange. If the price of convertible bond is issued at low price but the common stock is at high price so many bondholders will convert their bond into common stock. Thus, this cause the excessive dilution of shareholders’ equity occurred. To prevent too many shareholders’ equity being diluted, the price of convertible bond is higher than other bonds and some even higher than the price of common stock. As the result, bondholders will not convert their convertible bond into common stock easily and the net worth of shareholder will not decrease rapidly due to excessive dilution of shareholders’ equity being
Therefore, reason of issued convertible bond is firm developed high risks project or operation and there are also firm with substandard credit ratings and high expected growth issued convertible bond. Example, Tesla issued $3.3 billion of convertible bonds on March 2016 due to its high-risk project and its bond has a Standard & Poor’s rating of B-. (Tchir, 2017) A bond with a low bond rating can be indicated that it is more risky than other bonds such A, AA and AAA rating bonds because the bond may default easily. Bond ratings are important because it affect the interest rate that company pay to their issued bonds. Normally, the risky bond will have high coupon rate to attract the investors but convertible bond carries a lower coupon rate compare to its similar bond which is non-convertible bond due to its conversion features. As we know that, bond price and the yield have an inversely relationship. Thus, bond price of convertible bond is higher than other bond because of convertible bond carries a low yield. If market interest rate decreases then the price of convertible bond will be …show more content…
For instance, par value of convertible bond is $1000 and its conversion price is $50 so the conversion ratio is 20. This stated that bondholder can receive 20 common shares for each bond exchange. If the price of convertible bond is issued at low price but the common stock is at high price so many bondholders will convert their bond into common stock. Thus, this cause the excessive dilution of shareholders’ equity occurred. To prevent too many shareholders’ equity being diluted, the price of convertible bond is higher than other bonds and some even higher than the price of common stock. As the result, bondholders will not convert their convertible bond into common stock easily and the net worth of shareholder will not decrease rapidly due to excessive dilution of shareholders’ equity being