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Options and Corporate Finance > Convertible Securities
Convertible Securities
• Overview of Convertible Securities
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Options and Corporate Finance > Convertible Securities
Overview of Convertible Securities
• A convertible bond is a type of bond that the holder can convert into shares of
common stock in the issuing company or cash of equal value, at an agreed-upon
price.
• Convertible preferred stocks are securities that contain a provision in which the
holder may convert the preferred into the common stock of the company under
certain conditions.
• Convertible arbitrage involves the simultaneous purchase of convertible securities
and the short sale of the same issuer's common stock.
• Forced conversion usually occurs when the price of the stock is higher than the
amount it would be if the bond were redeemed.
Arbitrage
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Appendix
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Options and Corporate Finance
Key terms
• debt gearing debt techniques used to multiply gains or losses; also known as leverage.
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Options and Corporate Finance
Arbitrage
Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price. This diagram illustrates an arbitrage
opportunity in foreign currency exchange.
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Wikimedia. "Triangular-arbitrage." CC BY-SA http://commons.wikimedia.org/wiki/File%253ATriangular-arbitrage.svg View on Boundless.com
Options and Corporate Finance
Which of the following is a correct definition of a feature of
convertible bonds?
A) Conversion value is the equity price times the conversion ratio.
B) Call features is the ability of the bondholder to force the repayment of
the loan.
C) Put features is the ability of the issuer to call a bond early for
redemption.
D) The conversion ratio is the number of shares each convertible bond
converts into.
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Options and Corporate Finance
Which of the following is a correct definition of a feature of
convertible bonds?
A) Conversion value is the equity price times the conversion ratio.
B) Call features is the ability of the bondholder to force the repayment of
the loan.
C) Put features is the ability of the issuer to call a bond early for
redemption.
D) The conversion ratio is the number of shares each convertible bond
converts into.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Options and Corporate Finance
Which of the following is NOT an advantage for an issuer of using
convertible bonds?
A) Convertible bonds often have lower fixed-rate borrowing costs than
other types of bonds.
B) Convertible bonds increases a company's liquidity.
C) Convertible bonds defers the dilution of shareholder voting power.
D) The level of a company's debt gearing is increased.
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Options and Corporate Finance
Which of the following is NOT an advantage for an issuer of using
convertible bonds?
A) Convertible bonds often have lower fixed-rate borrowing costs than
other types of bonds.
B) Convertible bonds increases a company's liquidity.
C) Convertible bonds defers the dilution of shareholder voting power.
D) The level of a company's debt gearing is increased.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Options and Corporate Finance
Attribution
• Wikipedia. "Convertible security." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Convertible_security
• Wikipedia. "Convertible arbitrage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Convertible_arbitrage
• Wikipedia. "Convertible bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Convertible_bond
• Wikipedia. "Convertible preferred stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Convertible_preferred_stock
• Wikipedia. "debt gearing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/debt%20gearing
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