Question

Why do corporations issue convertible securities?

Answer 1

Convertible securities--- These are securities which has issued in different form initially ( i.e debenture or preferred stock) but after a defined period it has to be converted into comman stock of company.

Comman stock------- These are the stock,which enable the corporates to obtain finance without any conditions of returns and repayments.

But true power of company remains in the hand of comman shareholders.

Companies often issues convertible securities in order to maintain their long term cash in control.

If company issues convertible securities then it will have to pay a fixed rate or interest or dividend initially but the company will not be repaying any amount which it had received as source of finance initially ( I.e face value of finance obtained initially )

Hence company will have to pay small portion ( i.e fixed finance cost) for sometimes and after that this payment will also be stopped.

This will allow company to have more liquidity than, a case where it had to repay all the amount obtained.

Now a days loan or fixed rate preferred stock is considered a liquidity exhausting option, hence any company with option of debt or equity,will mostly choose equity for finance.

This option of financing through convertible securities cater the needs of finance of company initially and allow company a period to discharge its fixed interest obligations in parts.

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