An Introduction to Bond Markets, Fourth Edition

Chapter 7

CONVERTIBLE BONDS, MTNs AND WARRANTS

A significant segment of the Eurobond market is made up of convertible bonds. Convertibles (and warrants) are instruments that have option features attached to them, issued primarily by corporates but also sometimes by governments. The option attachments act as a further inducement for investors, and serve to make the instrument easier to sell than a plain-vanilla bond issued by the same company.

DESCRIPTION

A convertible bond is a bond that can be converted at the option of the holder into the ordinary shares of the issuing company. Once converted into ordinary shares, the shares cannot be exchanged back into bonds. The ratio of exchange between the convertible bond and the ordinary shares can be stated either in terms of a conversion price or a conversion ratio. For example, ABC plc’s 10% convertible bonds, with a face value of £1,000, may have a conversion price of £8.50, which means that each bond is convertible into 117.64 ordinary shares. To obtain this figure we have simply divided the face value of the bond by the conversion price to obtain the conversion ratio, which is £1,000/£8.50 = 117.64 shares. The conversion privilege can be stated in terms of either the conversion price or the conversion ratio. Conversion terms for a convertible do not necessarily remain constant over time. In certain cases convertible issues will provide for increases or step-ups in the conversion price at periodic intervals. A £1,000 denomination ...