Convertible Bond

What is Convertible Bond?

A Convertible Bond is a debt instrument that gives the bondholder the right to convert the bond into a fixed number of shares of the issuing company. It has characteristics of both debt and equity, thus becoming an attractive investment for people seeking regular income with the possibility of capital appreciation.

Key Features of Convertible Bonds

• Fixed Interest: Offers regular interest payments until maturity or conversion.
• Conventional Option: Redeemable by bondholders into shares at a price and date designated.
• Lower Interest Rates: Usually has lesser interest rate compare to regular bond since it affords the premium of conversion as well.

How convertible bonds work?

• A convertible bond is issued to an investor. The coupon is paid from time to time.
• At certain date, it can be exercisable by bondholder to become shares or get hold of for maturity date redemption of principal.
• The conversion ratio is what determines how many shares the bondholder will receive.

Advantages of Convertible Bonds

1. Income and Growth: It gives interest income and the potential for equity appreciation.
2. Risk Mitigation: It provides downside protection because bonds are repaid if not converted.
3. Flexibility: Investors can decide, based on market conditions, whether to convert or retain the bond.

Disadvantages of Convertible Bonds

1. Lower Yield: Interest rates are lower compared to traditional bonds.
2. Market Volatility: Conversion value depends upon the company's stock.
3. Risk of Dilution: More number of outstanding shares from conversion which, in turn may lead to existing shareholder's dilution.

Example of Convertible Bonds

Companies issue convertible bonds in India for raising funds while attracting investors seeking a mix of fixed income and equity exposure. For example, if a company issues a convertible bond with a face value of ₹1,000 and a conversion price of ₹200 per share, the bondholder can convert the bond into 5 shares (₹1,000 ÷ ₹200).

Convertible bonds are versatile investment tools that balance stability and growth and are popular among investors looking for diversified returns.