Sounds like a lesser-known, depressing Beach Boys song. All about how you were going to the beach and your car broke down..."Now, you're waiting for Triple A-A-A-A-AAAAAA."
In financial terms, the convertible here isn't a roofless car. It's a type of security. Specifically, it's a bond that can get turned into stock under certain conditions.
Usually, the owner of the bond has the option to turn the bond into a certain number of shares at a certain price. That price is known as the "conversion price." If the market value of the company's stock is well below the conversion price...that's a busted convertible.
So Beach Drive Inc. offers a convertible bond with the option to turn into stock at $25 per share. Right now, Beach Drive is trading at $5 per share. No one is going to do any converting for the foreseeable future. Busted convertible. "Now, you're waiting for Triple A-A-A-A-AAAAAA."
Thing is, a convertible bond should trade at a premium over normal debt for that company (assuming similar maturity and interest rates). After all, you have the same payout as the regular bond, but you also have the added option to take advantage of a high stock price, if the shares rise above the conversion price.
But in a busted convertible, that potential benefit is so far over the horizon that it doesn't impact the price. The convertible bond trades at the same price (or essentially the same price) as normal, run-of-the-mill bonds.
Related or Semi-related Video
Finance: What are Convertible Bonds?9 Views
Finance a la shmoop what are convertible bonds? okay there's a joke about the
Inquisition in here somewhere or maybe something about Cossacks and 17th
century Russia what do you think animated musical or maybe a King Henry [King Henry VIII appears]
thing but yeah all that's different kind of conversion way more pedantically a
company might be having a hard time selling or issuing its bonds to Wall [Man with company briefcase for head meets man with Wall Street briefcase for a head]
Street in order for them to close the deal with their stock trading today at
25 bucks a share they might say well these bonds are convertible into 20 [Man with company for a head discussing bonds]
shares of our stock that is they would have a single thousand dollar unit of
that bond and it would convert into 20 shares which would then value the shares
at 50 bucks either thousand divided by 20 there's 50 it's an advanced calculus
sorry if you didn't have it which would sort of be you know the over/under price
at which bondholders would start to seriously look at converting their nice
safe bonds into those risky pesky equities well why would a company offer
convertible bonds instead of you know just vanilla bonds well if they were [Man discussing convertible bonds]
stuck paying 6% interest on just bonds but really could only afford to pay 4%
well they might get the interest rate discount by throwing in that equity
kicker in the bonds having that convertibility feature yes they would
suffer dilution at 50 bucks a share but that price is double and change where
the stocks out here so the company is probably thinking that it wouldn't mind
some dilution from these bonds being converted up there in stock price right [Arrow points to stock value mark on graph]
and remember the bonds pay the 4% interest along the way until they are
converted the moment those bonds are converted into equity well then the debt
on the balance sheet of the company and its obligation to pay that 4% yearly [Company balance sheet and interest highlighted]
interest goes mercifully away they print 20 more shares for each bond converted
and yes those shares may pay a dividend but as far as the convertible bonds go
they are thereafter converted and saved and remember Jesus Saves but Moses
invests
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