Question

Bond:  What is a convertibility option? How is this beneficial for the corporation and for the investor?

Answer 1

Bond: What is a convertibility option?

A convertible obligation is the security of a fixed income debt that pays interest payments but can be converted to a predetermined number of ordinary shares or equity securities. The conversion from the bond to stock can be made periodically during the life of the bond and is usually at the provider's discretion.

How is this beneficial for the corporation and for the investor?

Investors are willing to convert fixed rate interest payments into stocks and benefit from share price appreciation.

Investors get some default risk protection as they are paid to bondholders before common stock.

Companies benefit from accumulating capital without diluting their stocks immediately.

Firms may pay lower interest rates on their debt compared to using traditional securities.