Five Types Of Convertible Bonds

Convertible bonds are hybrid tools, they include both equity and debt features. The Equity feature can be described as the common stocks which represents the owning part of an enterprise, generally used for dividends and voting rights. Unlike the equity, a bond displays the remaining debt of a certain enterprise, and that is promised to repay back the amount (principal) at a specific predetermined date in addition to the periodic interest payments until the maturity date. There are several different forms of convertible securities that will be further explained in our paper. One of these types of the convertible which contains some characteristics of convertible bonds are the convertible preferred stock, this type of security can be defined

They are issued by joint stock companies and they are an instrument of raising of capital, both equity capital and borrowed capital (Mamcarz 2013). As a source of capital raising by companies, they have numerous advantages. First of all, bonds, when compared with traditional bonds or bank loans, enable the issuers to raise cheap borrowed capital in return for the possibility to convert them into company shares. The issuer does not have to fear losing control over the company. Those instruments enable the improvement of the composition of the balance sheet and the use of the financial leverage and thereby give tax benefits (the possibility to claim the interest paid to the issuers as financial costs that reduce the income tax base). Convertible bonds also allow postponing a bond issuance until a later date when the run of the market improves or a business valuation reaches a higher level. Another advantage of convertible bonds is the possibility to postpone the effect of EPS indicator dilution resulting from a higher amount of shares outstanding. Simultaneously, debt for equity swap makes it unnecessary to return the capital raised, and the flexible character of the instrument allows

This allows issuers to simultaneously reduce the adverse effect of the “dilution of earnings”, especially for companies with high growth potential and substantial capital needs. In comparison with the classical form of debt instrument, company may offer a lower interest rate in exchange for a commitment to the non-cash benefits (conversion rights). This allows to accept and finance investment projects with lower expected rate of