What is Convertible bond?
A convertible bond is a type of bond that can be converted into a predetermined number of the company’s shares at the bondholder’s discretion, typically at certain points in time during the bond’s life. This financial instrument offers investors a fixed income through regular interest payments but also gives them the potential to participate in the company’s equity growth if the bond is converted into shares.
Key Features of a Convertible Bond
- Conversion Option: The primary feature of a convertible bond is the option for the bondholder to convert the bond into shares of the issuing company at a specified conversion rate. This allows bondholders to benefit from an increase in the company’s stock price.
- Fixed Interest Payments: Like other bonds, convertible bonds pay interest to bondholders at regular intervals. The interest rate is typically lower than that of traditional bonds due to the added value of the conversion option.
- Convertible into Equity: The bondholder can convert the bond into equity, effectively becoming a shareholder, which allows them to benefit from the company’s growth and potential increase in stock value.
Legal Framework and Considerations
In Switzerland, convertible bonds are regulated under the Swiss Financial Market Supervisory Authority (FINMA), which ensures that these bonds comply with financial market regulations. Companies issuing convertible bonds must disclose the terms of conversion, including the conversion price, the bondholder’s rights, and the risks involved.
- Conversion Price and Terms: The conversion price is set at the time of issuance and is usually fixed at a premium to the market price of the shares. It is important for both investors and companies to carefully consider these terms when entering into a convertible bond agreement.
- Dilution of Shareholders: When convertible bonds are converted into shares, the company issues new shares, potentially diluting the ownership stake of existing shareholders. Companies must weigh the benefits of raising capital through convertible bonds against the impact on current shareholders.