Page 11 - Mega Digi Page: General Awareness - Jan 2016
P. 11
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(General Awareness)
A convertible bond is a mixture of debt and equity instruments.
It is a bond having periodic coupon and principal payments, but these bonds also give an
option to the bondholder to convert the bond into stock.
FCCB is issued in a currency different than the issuer's domestic currency.
The investors receive the safety of guaranteed payments on the bond and are also able to take
advantage of any substantial price appreciation in the company's stock.
Due to the equity side of the bond, which adds value, the coupon payments on the bond
are lower for the company, thereby reducing its debt-financing costs.
Advantages
Some companies, banks, governments, and other sovereign entities may decide to issue
bonds in foreign currencies because, as it may appear to be more stable and
predictable than their domestic currency
Gives issuers the ability to access investment capital available in foreign markets
Companies can use the process to break into foreign markets
The bond acts like both a debt and equity instrument. Like bonds it makes
regular coupon and principal payments, but these bonds also give the bondholder the
option to convert the bond into stock
It is a low cost debt as the interest rates given to FCC Bonds are normally 30-50
percent lower than the market rate because of its equity component
Conversion of bonds into stocks takes place at a premium price to market price.
Conversion price is fixed when the bond is issued.
Advantages to investors
Safety of guaranteed payments on the bond
Can take advantage of any large price appreciation in the company’s stock
Redeemable at maturity if not converted
Easily marketable as investors enjoys option of conversion in to equity if resulting to capital
appreciation
Disadvantages
Exchange risk is more in FCCBs as interest on bond would be payable in foreign
currency. Large forex earnings potential only opted for FCCBs
In case of convertible bond the interest rate is low (around 3 to 4%) but there is
exchange risk on interest as well as principal if the bonds are not converted in to
equity
If the stock price plummets, investors will not go for conversion but redemption.
So, companies have to refinance to fulfil the redemption promise which can hit earnings
It remains a debt in the balance sheet until conversion
Date of Release -15-Jan-16 SUBJECT: GA www.bankersguru.org
(General Awareness)
A convertible bond is a mixture of debt and equity instruments.
It is a bond having periodic coupon and principal payments, but these bonds also give an
option to the bondholder to convert the bond into stock.
FCCB is issued in a currency different than the issuer's domestic currency.
The investors receive the safety of guaranteed payments on the bond and are also able to take
advantage of any substantial price appreciation in the company's stock.
Due to the equity side of the bond, which adds value, the coupon payments on the bond
are lower for the company, thereby reducing its debt-financing costs.
Advantages
Some companies, banks, governments, and other sovereign entities may decide to issue
bonds in foreign currencies because, as it may appear to be more stable and
predictable than their domestic currency
Gives issuers the ability to access investment capital available in foreign markets
Companies can use the process to break into foreign markets
The bond acts like both a debt and equity instrument. Like bonds it makes
regular coupon and principal payments, but these bonds also give the bondholder the
option to convert the bond into stock
It is a low cost debt as the interest rates given to FCC Bonds are normally 30-50
percent lower than the market rate because of its equity component
Conversion of bonds into stocks takes place at a premium price to market price.
Conversion price is fixed when the bond is issued.
Advantages to investors
Safety of guaranteed payments on the bond
Can take advantage of any large price appreciation in the company’s stock
Redeemable at maturity if not converted
Easily marketable as investors enjoys option of conversion in to equity if resulting to capital
appreciation
Disadvantages
Exchange risk is more in FCCBs as interest on bond would be payable in foreign
currency. Large forex earnings potential only opted for FCCBs
In case of convertible bond the interest rate is low (around 3 to 4%) but there is
exchange risk on interest as well as principal if the bonds are not converted in to
equity
If the stock price plummets, investors will not go for conversion but redemption.
So, companies have to refinance to fulfil the redemption promise which can hit earnings
It remains a debt in the balance sheet until conversion
Date of Release -15-Jan-16 SUBJECT: GA www.bankersguru.org
