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Convertible bonds are bonds that give the investor a chance to change the bonds into shares of common stock in the issuing company. The investor can also convert the bonds for an equivalent cash value, which is initially agreed upon. Convertible bonds offer advantages to issuers and investors.
Investors prefer convertible bonds since they are safer than common shares. One of the factors that make convertible bonds more attractive to investors is that they offer asset protection since their values cannot plummet beyond the bond’s floor value. The bonds can also provide high equity-like returns and are less volatile than regular shares. For start-up companies that require capital to finance a project, investors can benefit by converting their bonds into the company’s common stock. Doing so helps them leverage the company’s growth and benefit from capital appreciation when they become successful. Capital appreciation translates to stock price appreciation. Therefore, a convertible bond-holder can indirectly sell their common stock at a higher price than the present price (Liu, 2020). The bond-holder can obtain a potentially large return while enjoying the safety of a bond.
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Converting bonds into common stock also helps investors enjoy dual benefits since they enjoy a fixed interest rate till maturity and stock value appreciation. Additionally, investors also have the opportunity to influence the company’s decision. While bondholders are prohibited from voting for company directors, investors who own common stock can vote for directors. They can, therefore, make decisions that influence the company’s revenue, hence influencing stock prices.
Conclusion
Investors can benefit from converting bonds into common stock. Convertible bonds offer advantages to issuers and investors. They offer asset protection for investors since their values cannot plummet beyond the value of the bond floor. Converting bonds to common stock helps investors leverage the company’s growth and benefit from capital appreciation when the company grows. Investors enjoy dual benefits since they enjoy a fixed interest rate till maturity and stock value appreciation.
Reference
Liu, Z. (2020, August). Analysis of convertible bond investment value. Journal of Physics: Conference Series 1616 (1), 2-8. 10.1088/1742-6596/1616/1/012080
