Convertible Bonds
Issuing convertible bonds is one way for a company to minimize negative
investor interpretation of its corporate actions. For example, if an
already public company chooses to issue stock, the market usually
interprets this as a sign that the company's share price is somewhat
overvalued. To avoid this negative impression, the company may choose to
issue convertible bonds, which bondholders will likely convert to
equity anyway should the company continue to do well.
From the
investor's perspective, a convertible bond has a value-added component
built into it; it is essentially a bond with a stock option hidden
inside. Thus, it tends to offer a lower rate of return in exchange for
the value of the option to trade the bond into stock.
- wong chee tat :)
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