Forced Conversion

  

The issuer of this particular bond has the right as described in the indenture, to convert the bond either into, say, 25 shares of common stock (which sorta implies a stock price of 40 bucks or thereabouts)...or the issuer or company who sold the bond in the first place can simply call the bond and force-convert it into cash for the small conversion premium of 2.5 percent...or 25 bucks in this thousand dollar par value bond. That is, the issuer can force the conversion of their bonds into shares at a given price.

Forced conversion, in a bond sense, is usually something companies do when they can either refinance the bond at cheaper interest rates or are doing so well operationally that they have enough cash to just retire their debt. Either way, it’s usually way less painful than the other flavor of forced conversion, pioneered in Spain in the 17th century.

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Finance: What are Convertible Bonds?9 Views

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Finance a la shmoop what are convertible bonds? okay there's a joke about the

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Inquisition in here somewhere or maybe something about Cossacks and 17th

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century Russia what do you think animated musical or maybe a King Henry [King Henry VIII appears]

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thing but yeah all that's different kind of conversion way more pedantically a

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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]

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Street in order for them to close the deal with their stock trading today at

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25 bucks a share they might say well these bonds are convertible into 20 [Man with company for a head discussing bonds]

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shares of our stock that is they would have a single thousand dollar unit of

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that bond and it would convert into 20 shares which would then value the shares

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at 50 bucks either thousand divided by 20 there's 50 it's an advanced calculus

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sorry if you didn't have it which would sort of be you know the over/under price

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at which bondholders would start to seriously look at converting their nice

01:01

safe bonds into those risky pesky equities well why would a company offer

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convertible bonds instead of you know just vanilla bonds well if they were [Man discussing convertible bonds]

01:12

stuck paying 6% interest on just bonds but really could only afford to pay 4%

01:18

well they might get the interest rate discount by throwing in that equity

01:23

kicker in the bonds having that convertibility feature yes they would

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suffer dilution at 50 bucks a share but that price is double and change where

01:32

the stocks out here so the company is probably thinking that it wouldn't mind

01:36

some dilution from these bonds being converted up there in stock price right [Arrow points to stock value mark on graph]

01:42

and remember the bonds pay the 4% interest along the way until they are

01:47

converted the moment those bonds are converted into equity well then the debt

01:51

on the balance sheet of the company and its obligation to pay that 4% yearly [Company balance sheet and interest highlighted]

01:56

interest goes mercifully away they print 20 more shares for each bond converted

02:02

and yes those shares may pay a dividend but as far as the convertible bonds go

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they are thereafter converted and saved and remember Jesus Saves but Moses

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invests

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