A convertible bond market is a bond market that deals with the trading of convertible bonds. A convertible bond is a bond that can be changed over to stocks or shares of the issuer organization on the basis of a predetermined ratio.
Convertible bonds are frequently referred to as convertible debentures. A convertible bond is a form of hybrid security that has both the characteristics of a debt security and an equity security. The convertible bonds offer a low coupon rate. Nevertheless, the compensation is provided to the bondholder with the benefit of conversion of the bond to common stock.
The amount of premium payable is decided as a percentage of the market value of the share and the premium amount is also quite high. From the point of view of the issuer, the principal benefit of raising funds through issuing convertible bonds is the advantage of decreased payment of cash interest. The principal convertible bond markets are located in Japan and the United States.
They are recognized all over the world, and according to market capitalization these two domestic convertible bond markets are the biggest in the world.
The convertible bond market of the USA is regarded as a market with high liquidity. The convertible bond market of Japan is comparatively more controlled than the other markets. In Europe, the convertible bond market is becoming a progressively significant source of funding for European bond issuers. The Asian convertible bond market (excluding Japan) offers a comprehensive variety of choices for the investors.
The essential features of a convertible bond include the following:
Parity value or conversion value
The convertible bond market usually deals with the following types of bonds:
SPV (Special Purpose Vehicle) structures
Vanilla convertible bonds
Contingent convertibles (Co-Co)
OCEANEs (Obligation Convertible En Actions Nouvelles ou Existantes-France)
Convertible preferred stock (In the United Kingdom, they are known as convertible preference shares)
In the convertible bond market, the valuation of the convertible bonds is done on the basis of the following methods:
Junk convertible bond valuation: These bonds are regarded as below investment grade bonds and are valued on the basis of the interest changes.
In the-money convertible bonds valuation: In case of in-the-money convertible bonds, the conversion price is less than the equity price.
At-the-money convertible bonds valuation: In case of at-the-money convertible bonds, the conversion price is equal to the equity price.
Out-the-money convertible bonds: In case of out-the-money convertible bonds, the conversion price is greater than the equity price.
Last Updated on : 10th July 2013