Question

Why do companies bother to issue convertible securities, such as convertible bonds? What's wrong with just issuing a good old plain vanilla bond rather than going through the added bother and complexity of incorporating a convertible feature? Separately, why do companies bother to issue stock warrants? Considering that such securities only create a more complex capital structure, what's the point of these things?

Answer 1

Covertable bonds are corpoarte bonds that can be exchanged for common stock in the issuing company.

Companies issues convertable bonds to lower the coupon rate on debt and to delay dilution.A bonds conversion ratio determines how many share an investor get for it.Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.

Companies will issue convertable bonds or debenture fore two main reasons.The first is to lower the coupon rate on debt,the investir will generally accept lower coupon rate on convertable bonds.

A vanilla convertable bonds allows the investors to hold it until maturity or convert it to stock,so due to this reason it is not favour to issue such bonds.

Stock warrants are issued due to it provides an additional source of capital to the company for the future.stock warrants attracts more investors.stock warrants are prone to market risk.