What are Convertible Bonds

Convertible bonds are a type of debt security that provides investors with the right to convert their bonds into a fixed number of shares of the offering company. These bonds are also known as hybrid security, as they have features of both debt and equity. Just like a regular bond, these bonds have a maturity date, and they pay interest to investors. Additionally, if an investor decides not to convert their bonds to equity, they may receive the bond’s face value at maturity. However, if the bonds are converted to the company’s shares, then the bonds will lose all their debt features and will have only equity features. This article explains what is a convertible bond, its advantages, disadvantages, types, and more.  

What are the Different Types of Convertible Bonds? 

The following are the different types of convertible bonds in India. 

Regular Convertible Bonds 

The regular convertible bonds offer a fixed interest payment. These bonds allow investors to convert bonds into equity at a set price before maturity. 

Mandatory Convertible Bonds 

These bonds require investors to convert the bonds into equity shares at maturity. They usually offer higher interest due to compulsory conversion. 

Reverse Convertible Bonds 

These bonds provide the issuer the right to decide whether the bonds will be converted into equity shares, typically based on the predetermined share price at maturity. 

After understanding the convertible bond meaning and their types, let’s understand conversion ratio.    

Know about Conversion Ratio? 

The conversion ratio shows how many equities an investor may receive for each convertible bond taken. If the conversion ratio is higher, then it means more shares can be obtained from the conversion. With this ratio, investors can easily determine the conversion price, which is calculated by dividing the bond’s face value by the conversion ratio. This helps investors understand how the bond can translate into equity and review the potential value of conversion. 

Pros and Cons of Convertible Bonds 

The table below shows the pros and cons of convertible bonds.  

Conclusion 

Convertible bonds combine the advantages of both debt and equity. They offer fixed interest payments along with the option to convert into company shares. Such bonds might give stability with an interest income and also provide an opportunity to increase capital when the market is favourable. Investors who are interested in a moderate risk and growth balance can consider convertible bonds. Before investing, investors can study the conversion ratio, maturity and interest rate. For easy access to such instruments, investors can explore them on an online trading app. This simplifies the process of evaluating and purchasing convertible bonds.