CONVERTIBLE BOND
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A convertible bond is a hybrid security that can be converted into shares of the issuing company's equity at a predetermined price. It gives the bondholder the option to exchange the bond for a set number of shares. Convertible bonds offer upside potential if the stock price rises through conversion while also providing downside protection through interest payments and repayment of principal. They are attractive to companies with high growth potential but also high risk, as the conversion feature allows the company to strengthen its equity base if its stock price appreciates.
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Cost of Capital,Meaning,Computation of Specific Costs,Cost of Debt,Cost of Preference Shares,Cost of Equity Capital,Cost of Retained Earnings ,Weighted Average Cost of CapitalSECTION IV - CHAPTER 22 - Equities
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Equities represent ownership in a company through shares of stock. When a company issues stock, it receives money in exchange that it can use for operations or expansion. In turn, stockholders receive potential benefits like capital gains if the stock price increases, dividends, and voting rights. Technical analysts examine factors like price, volume, market capitalization and corporate actions to evaluate individual stocks and sectors.Investment Securities
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This document provides an overview of equities (stocks) including:
- Equities represent ownership in a company after debts are paid off and include benefits like capital gains, dividends, and voting rights.
- Common types of equities include warrants, preferred stocks, and convertible bonds.
- Corporate actions like stock splits, dividends, and secondary offerings impact stock holders.
- Technical analysts examine factors like price, volume, market capitalization to evaluate stocks.
- Markets can be segmented by sector, company size, geography and other criteria for analysis.Ch 03
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This chapter discusses the valuation of bonds and shares. It explains the characteristics of ordinary shares, preference shares, and bonds. It shows how present value concepts are used to value these securities. The chapter focuses on the price-earnings ratio and its proper and improper uses in valuation. It also covers the determinants of bond values such as maturity, yield to maturity, current yield, and sensitivity to interest rate changes.Mutual fund
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Mutual funds pool money from many investors and invest it in stocks, bonds, and other securities. They are professionally managed collective investment schemes. In India, there are over 1000 mutual fund schemes from 44 companies with over Rs. 5 lakh crore in assets under management. Mutual funds have a sponsor, trustees to ensure rules are followed, and an asset management company that does the investing. They offer various types of funds across equity, debt, and hybrid categories for different investment needs and risk appetites.Meeting 4 - Valuation Market Ratios (Financial Reporting and Analysis)
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This document outlines various methods for valuing stocks and equity, including:
1) Balance sheet valuation methods like book value, liquidation value, and replacement cost.
2) Dividend discount models that value a stock based on the present value of expected future dividends.
3) Free cash flow models that value a company based on the present value of expected future free cash flows discounted at the weighted average cost of capital.
4) Earnings multiplier approaches that value stocks based on price-to-earnings or enterprise value-to-EBITDA multiples.SECTION IV - CHAPTER 21 - Market Instruments , Data & The Technical Analyst
SECTION IV - CHAPTER 21 - Market Instruments , Data & The Technical AnalystProfessional Training Academy
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CONVERTIBLE BOND
- 1. CONVERTIBLE BOND • Convertible bond have been issued and traded since 1880s • A convertible bond is a bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. • Convertible bonds, or converts, give the holder the option to exchange the bond for a predetermined number of shares in the issuing company.
- 2. • It is a hybrid security with debt and equity • A convertible bond typically has a coupon rate lower than that of similar non-convertible debt • The investor receives the potential upside of conversion into equity while protecting downside with cash flow from the coupon payments and the return of principal upon maturity • These properties lead naturally to the idea of convertible arbitrage, where a long position in the convertible bond is balanced by a short position in the underlying equity.
- 3. 3 Convertible bonds • Various features in convertible bonds • Issuance of convertibles - perspectives of corporate treasurers - conversion into shares - call (hard and soft provisions) - put - reset on conversion number . Decomposition of convertibles into different components • Valuation of convertibles - interest rate sensitivities (duration analysis) - binomial tree calculations
- 4. Bondholder has the right to convert the bond into common shares at some contractual price (conversion number may change over time). Conversion value: stock price x conversion number Conversion premium: (bond price – conversion value) / conversion value Bond floor value: sum of present value of coupon and par
- 5. 5 Analytics of convertible bonds figures (hypothetical figures) stock price $30.00 per share stock dividend $0.50 per share convertible market price $1,000 coupon rate 7.00% maturity 20 years conversion price $36.37 Stock dividend yield = annual dividend rate / current stock price = $0.50 / $30.00 = 1.67%
- 6. 6 Conversion ratio = number of shares for which one bond may be exchanged = par / conversion price = $1,000 / $36.37 = 27.50 shares Conversion value = equity value or stock value of the convertible = stock price x conversion ratio = $30.00 x 27.50 = $825.00 Conversion premium = (convertible price – conversion value) / conversion value = ($1,000 – $825) / $825.00 = 21.21%
- 7. 7 Types of companies as convertible issuers Companies that are characterized by strong performing, high- visibility, sub-investment grade, high-growth potential have comparative advantage in the convertible market versus the fixed income market. • They lack a long-term track record and have volatile capital structures – high coupon must be offered. • They can transform the high volatility into a benefit since the warrant is more expensive. • When the company grows, they may call the bonds. This in turn will strengthen the company’s equity base at the moment when it is most needed.
- 8. Analysis of a convertible bond • Conversion value • Minimum value of a convertible bond • Market conversion price • Market conversion premium per share • Market conversion premium ratio • Downside risk with a convertible bond • Upside potential of a convertible bond