Convertible bonds
Convertible bonds are issued by companies and contain an embedded option that allows the holder to convert the bond into a number of shares of common stock. The amount of shares to be converted for a bond is defined as the conversion ratio, which is determined such that the dollar amount of shares is the same as the value of the bond.
Convertible bonds have similarities with callable bonds. They allow the bond holders to exercise the bond for an equivalent amount of shares at the specified conversion ratio at agreed times. Convertible bonds typically issue lower coupon rates than non-convertible bonds, to compensate for the additional value of the right to exercise.
When convertible bond holders exercise their rights into ...
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