Question

What are the criteria you would use to assess Mandatory Convertible Bonds?

Answer 1

A convertible bond gets its name because it is a fixed income debt instrument that can be converted into a predetermined number of common stocks.

It helps the company to raise capital at lower interest rates than the traditional bonds because of the conversion option. Convertible bonds are typically issued by companies with substandard ratings and high potential of growth, issuing traditional bonds is too expensive for such companies.

By issuing a convertible bond, the company can defer the negative impact of the dilution of control among the shareholders.

As it is a hybrid security, we need to add the value of the conversion option to the original bond value to derive the value of a convertible bond

Value of convertible bond = Value of a straight bond + Value of conversion option.

There are many types of convertible bonds such as Vanilla convertible bonds, Mandatory convertible bonds, reversible convertible bonds, etc. Companies such as Tesla, Twitter, snap, etc have issued the convertible bonds to raise the capital. Such bonds are very popular among tech companie