Why A Corporation May Consider Convertible Bond Issuance

781 WordsSep 5, 20164 Pages
There are number reasons a corporation may consider convertible bond issuance. The instrument itself is a bond that may be converted to another type of security at the company that issued the bond. Converting such an item is all left up to the discretion of the bondholder. The reason for a company to want to issue such an item of course would always be in the best interest of the company itself for doing so. Convertible bonds are considered what is known as a hybrid security where it is considered to be both debt and equity by the issuing company (Saunders & Cornett, 2015, p. 185). One of the reasons the company would want to issue convertible bond would be is the yield that they have to pay generally lower than that of a non-convertible bond. The reason the rate is lower is important because it is indeed a hybrid security where gives the bondholder an investment opportunity in the company in the future, hence making the instrument more attractive to investors (Badraoui & Ouenniche, 2014). Since the instrument is more attractive, a lower yield may be offered that will still garner and peak invested interest in the product (Saunders & Cornett, 2015). Pricing is usually set so as not in the best interest to convert the bond stock unless the company sees an increase of the stock price in the range from 15 to 20 percent from the time the bond was issued (Saunders & Cornett, 2015, p. 187). The most common type of debt covenants that will show up in a contract between a

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