Debt instruments offering the holder the option to convert the bond into a specified number of common shares of the issuing company at predetermined conditions.
Mechanism
These bonds function as a hybrid security, providing fixed income payments and the potential for equity participation. The conversion option’s value is derived from the underlying stock’s price, interest rates, and volatility, introducing an embedded derivative component.
Methodology
Issuers leverage convertible bonds to secure capital at lower interest rates compared to traditional debt, while investors gain downside protection from bond characteristics and upside potential from equity conversion, influencing corporate finance and investment strategies.
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