Question

a). Find details of a convertible bond that is currently available for trading anywhere in the world. List the characteristics and conversion details of the bond.

b). Provide a current investment recommendation for the convertible bond –that is, would you currently recommend it for investment –why or why not?

(there is no details for bond, please provide your own example)

Answer 1

A convertible bond is a hybrid security with some features of bonds and some of equity. These bonds have an option of being converted into company's stock. Companies benefit from issuing convertible bonds as these are issued at a lower coupon rate and has the benefit of delayed dilution of common stock.

For Example: Exxon Mobil Corporation Convertible Bond

Face Value: $1000 , Interest rate:4%

Maturity Period: 10 years, Conversion Option : 100 shares for each bond.

If the bond is held till maturity: Investor will receive $1000 + $40 interest.

If the bond is converted to shares: Investor will receive 100 shares, which can be sold at current market price of share.

Assuming..

• CMP $12, investor would receive $1200 by selling the stocks.
• CMP $9, investor would receive $900 by selling the stocks.

Advantage: Investor receives fixed rate of interest and also has an option of taking benefit from stock price appreciation.

Disadvantage: Coupon Rate is low due to conversion option.

An investor should invest in this convertible bond as it has negligible risk, investor can choose to redeem the bond at maturity and receive assured interest ($40 in above example) or if stock price has appretiated ($12 in above example) the bond can be converted into shares to take the benefit of stock price appreciation. It is a good investment option as it offers both safety and growth opportunity.