Question

In the capital market environment we are now in would you invest in convertible securities? As a corporation, would you sell convertible securities? Do you perceive any conflict between the goals of the investor and the corporation? Please remember to reference cite and source.

Answer 1

A convertible security is a security that can be converted into another security.Convertible securities may be convertible bonds or preferred stocks that pay regular interest and can be converted into shares of common stock (sometimes conditioned on the stock price appreciating to a predetermined level).

As a corporation, the convertible securities are issued by companies with the aim of raising money. Companies having access to conformist methods of raising funds, like public offerings and bank financings, might proffer convertible securities for specific business reasons. Companies which are not able to strike the traditional sources of funding might sometimes provide convertible securities as a method of raising quick money.But I would no prefer to sell because of below reason:

The more shares issued at the time of conversion indicate the higher dilution to the shareholders’ dilution. Moreover, the company will have more outstanding shares after the conversion, lower revenues per share, and the individual investors will possess proportionally less of the company.A greater dilution indicates a higher possibility of decline in the stock price per share thus resulting in greater number of shares required to be issued in future conversions. This mi9ght make it more difficult for the company to get other financing.

Convertible investments have been touted as offering the best of both worlds: the stability of fixed income coupled with the upside of equities.But these securities aren’t as simple as that.Convertible bonds let investors convert their holdings to common stock at a time of their choosing within the term of the investment (generally five to seven years).However, if the company goes bankrupt, all other fixed-income investors will be paid before convertible bondholders.

Companies should understand the terms and risks of convertible security arrangements so that they can appropriately evaluate the issues that arise. Companies entering into these types of convertible securities transactions should understand fully the effects that the market price based conversion ratio may have on the company and the market for its securities. Companies should also consider the effect that significant share issuances and below market conversions have on a company's ability to obtain other financing.If the company has engaged in convertible security financings, be sure to ascertain the nature of the convertible financing arrangement - fixed versus market price based conversion ratios. Be sure you fully understand the terms of the convertible security financing arrangement, including the circumstances of its issuance and how the conversion formula works.