Convertible Currency

  

Categories: Derivatives, Stocks, Trading

Some governments put a tight restriction on their currencies. Others don't. Those with little or no restriction (you can count the dollar and the euro in this group) are known as convertible. These trade freely on the open market.

The highly restricted currencies are known as non-convertible. However, it's not a simple black-or-white situation. There is a lot of grey space in the convertibility discussion.

For instance, there are some countries (like Cuba and North Korea) where exchanging currency above a certain amount is illegal. Meanwhile, China actually has two currencies. There's one that exists outside of China (designated by the code CNH). There's a second one that gets used inside China (CNY). Any transaction involving a person or company inside the country has significant restrictions on convertibility. However, the CNH version floats relatively unencumbered.

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Finance: What is Convertible Debt?43 Views

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finance a la shmoop. what is convertible debt? okay so we presume you

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know what debt is. if not go uh you know watch that video. we'll wait actually no [man smiles at camera]

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we won't wait. so convertible debt is just normal debt

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but with one potentially highly valuable added feature. its convertible into

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something else. well we were Marvel superheroes that would be our superpower.

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you know finance man or something like that.

00:32

anyway example time. drone Ranger Inc needs money to upgrade a factory so that

00:37

it can produce drones that don't just fly, they swim too. like Aquaman. Alright well

00:43

prevailing interest rates for its level of risk and credit worthiness are 7%. the

00:49

company needs to raise a hundred million bucks, and the idea of paying seven [graph shown]

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million dollars a year for that debt is just too high a price, so the CEO boss

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says no .no new factory for you but if the company could get the debt cheaper

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well then she might run bulk. unfortunately the company's stock trades

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today at a very low multiple of earnings. only 15 times the dollar share they'll

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earn this year. so I don't want to raise the hundred million dollars by selling

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equity. it would be dilutive to do so, meaning that they would have to print

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too many shares to raise that hundred million dollars, specifically a hundred [Dilution defined]

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million divided by 15 or six and a half-ish million shares. well some of the

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company's investors or rather all of them believe that the company's stock is

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and or will be worth more per share than it is today at some point in the future.

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otherwise they wouldn't own the stock today, right?

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so the wily CFO of the company wonders if there's a Miley Cyrus style best of

01:49

both worlds solution here where you could sell equity at a higher price in

01:54

the future in part for a price decline on the cost of renting the debt. and in [Cyrus shown swinging across screen]

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fact there is and yeah you guessed that it's called a convertible bond, or

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convertible debt. yeah different kind of conversion there.

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all right well the drone rangers stock is 15 bucks a share today but through

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careful negotiated back-and-forth with capital markets people at an investment

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bank, the company learns that there actually is demand for its debt price to

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pay only 3% interest. if that debt is convertible into equity at 30 bucks a

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share. so what does that mean? well if the stock stays under 30 bucks so pretty [definitions on screen]

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much forever, then the buyers of the debt or the lenders of the money to the

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company got taken. that is they only got three percent interest on their money

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when they should have gotten seven percent for loaning money as debt to the

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company. but if the stock takes off and the over water underwater drones really

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you know fly off the shelves, then the convertibility feature of the

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debt will be exercised or used which would be a good thing. so the debt is

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convertible at 30 bucks a share which means that a hundred million dollars

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raised would cause the company to be diluted a hundred billion divided by 30

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bucks, or you know 3.3 ish million shares, I eat it's half the dilution it would [equations]

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have been at the company just sold shares at 15 bucks each.

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it essentially wrote a call option to the buyers of the debt to be able to

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call or buy its stock for 30 bucks a share or 30 times the current year's

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earnings at some point you know whenever in the future. like being diluted at 30

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times earnings is way less painful than being diluted at 15 times.

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so yeah that's convertible debt in a nutshell. not what you find yourself in

03:40

during your midlife crisis when you desperately feel the urge to buy a [woman races by in sports car]

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silver Beamer that cost three times our annual salary yeah. been there it was a

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nice Beamer

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