Bond Conversion

Bond conversion refers to the process of converting a convertible bond into a predetermined number of shares of the issuing company’s stock. Convertible bonds are hybrid securities that offer the safety of a fixed-income bond while providing the potential upside of equity participation. The conversion is usually at the discretion of the bondholder, allowing them to convert the bond into shares if the company’s stock performs well. The terms of the conversion, including the conversion ratio and conversion price, are specified in the bond’s prospectus.

Example

An investor holds a convertible bond with a conversion ratio of 20:1, meaning they can convert each bond into 20 shares of the company’s stock. If the stock price rises significantly above the conversion price, the investor may choose to convert the bond to shares to capture the equity gains.

Key points

• Bond conversion allows a convertible bond to be exchanged for a set number of shares.

• Offers fixed-income benefits with potential equity upside.

• Conversion terms are detailed in the bond’s prospectus.

Quick Answers to Curious Questions

Why might an investor choose to convert a bond into stock?

An investor may convert if the company’s stock price rises significantly, offering potential gains that exceed the bond’s fixed-income returns.

What is a conversion ratio in bond conversion?

The conversion ratio is the number of shares that a bondholder receives upon converting the bond into equity.

How does bond conversion benefit companies?

It allows companies to raise capital at lower interest rates while potentially limiting the dilution of equity if the bondholders choose not to convert.