Convertible bonds are considered to be a unique combination of debt and equity. They provide investors with the chance to convert a debt instrument into shares of common stock of the Issuer at a set price and usually by a certain date. This is usually done at the discretion of the bondholder, and in some cases to provoke convertible bonds is the price of shares once the price of the shares of the Issuer reaches a given threshold, the bonds convert automatically. The Issuer of the convertible bonds can be flexible terms of financing for companies, and typically more useful for companies with high risk/reward profiles.
As the bonds are convertible into shares
Convertible bonds are a bone of contention among some investors and is a shareholder. Why? Because the shares that convertible bonds when they convert their bonds in the form of newly-issued securities. Thus, in the absence of anti-dilution provisions, convertible bonds almost always dilute the percentage ownership of current shareholders.
The result of the shareholders own a smaller piece of the pie after bondholders to convert their enterprise. One of the main reasons why convertible bonds are not so unpleasant for shareholders is that most small investors don’t ever get a chance to buy them. Convertible bonds with a juicy conversion features — low rates of conversion, conversion factors and preferential interest rates above the market — issued in private placements to investors who already have a financial relationship with the company. Unfortunately, for the average investor, this practice is unlikely to change in the near future.
For example, Carnival Corp. (CCL) issued to certain zero coupon convertible bonds in 2003, which is automatically converted into shares if the share price Carnival reached $33.77. Under the agreement, the convertible bonds will be allowed to buy company stock at $30.70 per share. Since bonds did not pay much interest, the difference 3.07 $between the market price and the conversion price of the bonds provided by the bond investors a little sweetener for the purchase of bonds. Unfortunately for shareholders who do not own bonds, bonds convertible into more than 17 million shares, which is rather vague conversion and the impact on positions.
(For more information, see convertible bonds: an Introduction.)