Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split.

Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split. An adjustment in conversion terms must compute the adjusted conversion price in accordance with the Officer's Certificate, which delineates the facts on which such conversion price adjustment is based. When an adjustment is made to a conversion price, the company must compute the adjusted conversion price in accordance with the Officer's Certificate—a document signed by a senior-level company executive, such as the board chair, president, chief financial officer, the chief executive officer, controller, principal accounting officer, treasurer or general counsel. An optional conversion extends to shareholders the right to convert their preferred shares into common shares when they believe it is advantageous to do so—namely, when the buyout of the converted common shares will yield higher returns than preferred shares. Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split.

Adjustment in Conversion Terms

Bond floor refers to the minimum value a specific bond should trade for. The bond floor is derived from the discounted value of a bond's coupons, plus its redemption value.

where: C \= coupon rate of convertible bond P \= par value of convertible bond r \= rate on straight bond n \= number of years until maturity \\begin{aligned} &\\text{Bond Floor} = \\sum\_{t = 1} ^ {n} \\frac{ \\text{C} }{ ( 1 + r ) ^ t} + \\frac{ \\text{P} }{ (1 + r) ^ n }\\\\ &\\textbf{where:} \\\\ &\\text{C} = \\text{coupon rate of convertible bond} \\\\ &\\text{P} = \\text{par value of convertible bond} \\\\ &r = \\text{rate on straight bond} \\\\ &n = \\text{number of years until maturity} \\\\ \\end{aligned} ​Bond Floor\=t\=1∑n​(1+r)tC​+(1+r)nP​where:C\=coupon rate of convertible bondP\=par value of convertible bondr\=rate on straight bondn\=number of years until maturity​
Bond Floor \= PV coupon \+ PV par value where: PV \= present value \\begin{aligned} &\\text{Bond Floor} = \\text{PV}\_{\\text{coupon} } + \\text{PV}\_\\text{par value} \\\\ &\\textbf{where:} \\\\ &\\text{PV} = \\text{present value} \\\\ \\end{aligned} ​Bond Floor\=PVcoupon​+PVpar value​where:PV\=present value​
For example, assume a convertible bond with a $1,000 par value has a coupon rate of 3.5% (to be paid annually). Consider there is also a comparable straight bond, with the same face value, credit rating, interest payment schedule, and maturity date of the convertible bond, but with a coupon rate of 5%.
To find the bond floor, one must calculate the present value (PV) of the coupon and principal payments discounted at the straight bond interest rate.
PV factor \= 1 − 1 ( 1 \+ r ) n \= 1 − 1 1 . 0 5 1 0 \= 0 . 3 8 6 1 \\begin{aligned} \\text{PV}\_\\text{factor} &= 1 - \\frac{ 1 }{ (1 + r) ^ n } \\\\ &= 1 - \\frac{ 1 }{ 1.05^ {10} } \\\\ &= 0.3861 \\\\ \\end{aligned} PVfactor​​\=1−(1+r)n1​\=1−1.05101​\=0.3861​
PV coupon \= . 0 3 5 × $ 1 , 0 0 0 0 . However, when stock prices are low, the convertible bond will trade like a straight bond—given that the straight bond value is the minimum level a convertible bond can trade at and the conversion option is nearly irrelevant when stock prices are low. 0 5 × PV factor \= $ 7 0 0 × 0 . 3 8 6 1 \= $ 2 7 0 . 2 7 \\begin{aligned} \\text{PV}\_\\text{coupon} &= \\frac {.035 \\times \\$1,000 }{ 0.05 } \\times \\text{PV}\_\\text{factor} \\\\ &= \\$700 \\times 0.3861 \\\\ &= \\$270.27 \\\\ \\end{aligned} PVcoupon​​\=0.05.035×$1,000​×PVfactor​\=$700×0.3861\=$270.27​
PV par value \= $ 1 , 0 0 0 1 . 0 5 1 0 \= $ 6 1 3 . 9 1 \\begin{aligned} \\text{PV}\_\\text{par value} &= \\frac {\\$1,000 }{ 1.05 ^ {10} } \\\\ &= \\$613.91 \\\\ \\end{aligned} PVpar value​​\=1.0510$1,000​\=$613.91​
Bond Floor \= PV coupon \+ PV par value \= $ 6 1 3 . 9 1 \+ $ 2 7 0 . 2 7 \= $ 8 8 4 . 1 8 \\begin{aligned} \\text{Bond Floor} &= \\text{PV}\_{\\text{coupon} } + \\text{PV}\_\\text{par value} \\\\ &= \\$613.91 + \\$270.27 \\\\ &= \\$884.18 \\\\ \\end{aligned} Bond Floor​\=PVcoupon​+PVpar value​\=$613.91+$270.27\=$884.18​
So, even if the company's stock price falls, the convertible bond should trade for a minimum of $884.18.

Bond Floor

A compulsory convertible debenture (CCD) is a bond that must be converted into stock at its maturity. It is a hybrid security, neither bond nor stock.

A compulsory convertible debenture (CCD) is a type of bond which must be converted into stock by a specified date. A debenture comes in two forms – non-convertible and convertible:
A non-convertible debenture cannot be converted into equity shares of the issuing company. Unlike pure debt issues, such as corporate bonds, compulsory convertible debentures do not pose a credit risk for the company issuing them since they eventually convert to equity. A compulsory convertible debenture (CCD) is a type of bond which must be converted into stock by a specified date. A compulsory convertible debenture is a bond that must be converted into stock at its maturity date.

Compulsory Convertible Debenture (CCD)

Contingent convertibles (CoCos) are similar to traditional convertible bonds in that there is a strike price, which is the cost of the stock when the bond converts into stock.

Eligibility of Contingent Convertible Capital Securities for an Offering Under Rule 144A

Basel III: International Regulatory Framework for Banks

Contingent convertibles (CoCos) are debt instruments primarily issued by European financial institutions. Instead of converting bonds to common shares based solely on stock price appreciation, investors in CoCos agree to take equity in exchange for the regular income from the debt when the bank's capital ratio falls below regulatory standards. The triggering event for CoCos can be the bank's value of Tier 1 capital, the judgment of supervisory authority, or the value of the bank's underlying stock shares. If Tier 1 capital falls below 5%, the convertibles automatically convert to equity, and the bank improves its capital ratios by removing the bond debt off its balance sheet. One type of bank capital is Tier 1 capital—the highest-rated capital available to offset bad loans on the institution's balance sheet.

Contingent Convertibles (CoCos)

The conversion value is that of a convertible security, if its call option is exercised.

The term conversion value refers to the financial worth of the securities obtained by exchanging a convertible security for its underlying assets. Assuming that the bond’s conversion ratio is 50 shares per bond, and the bond shares of XYZ stock are trading at $20, then the conversion value of one bond would be $1,000 (i.e. 50 x $20) As with types of investments such as stock options, a key objective with a convertible security is to hold onto it until the market price is higher than the conversion value, thus generating profit through the conversion and later sale of the common stock received. The conversion value is closely related to the market conversion price or parity value, which are used to identify break-even values at a particular stock price. It might be necessary for the issuers of convertible notes to bifurcate, or divide the fair value or price of a convertible bond between fair values for the conversion aspect and for the straight debt, which cannot be converted.

What Is Conversion Value?

A conversion premium is the amount by which the price of a convertible security exceeds the current market value of the common stock into which it may be converted.

A conversion premium is an amount by which the price of a convertible security exceeds the current market value of the common stock into which it may be converted. The cash-flow payback period is the time it would take for the convertible to earn interest equal to the conversion premium plus the stock dividends if the number of shares specified in the conversion ratio was purchased instead of the convertible. The conversion feature in the trust indenture may also be expressed as a conversion price, which is equal to the face value of the bond divided by the conversion ratio. The conversion premium is used to calculate the bond’s payback period, that is, the amount of time it would take for the bond to earn the conversion premium plus all stock dividends over the period. A conversion premium is expressed as a dollar amount and represents the difference between the price of the convertible and the greater of the conversion or straight bond value.

Conversion Premium

Convertibles are securities, usually bonds or preferred shares, that can be converted into common stock.

Convertibles are securities, usually bonds or preferred shares, that can be converted into common stock. While convertible bonds can be very valuable if the company's share price sees a large increase, the fact that convertibles are callable not only limits that upside, it can sometimes force investors to take a loss if the issuer forces investors to convert at an inopportune time.
A vanilla convertible bond, perhaps the least complicated convertible, provides the investor with the choice to hold the bond until maturity or convert it to stock. Furthermore, a reversible convertible bond gives the company the right to convert the bond to equity shares or keep the bond as a fixed income investment until maturity. The rate at which investors can convert bonds into stocks—that is, the number of shares an investor gets for each bond—is determined by a metric called the conversion rate. However, on the downside, it is not always profitable to convert bonds into equities, and most convertible bonds have a feature that allows the company to force investors to convert at a certain time.

Convertibles

An exchangeable debt is a type of hybrid debt security that can be converted into the shares of a company other than the issuing company.

An exchangeable debt is a type of hybrid debt security that can be converted into the shares of a company other than the issuing company (usually a subsidiary). Because of the convertible nature of exchangeable debt, they carry a lower coupon rate and offer a lower yield than comparable straight debt (debt without a conversion provision).
The conversion price, the conversion ratio, and the debt maturity are specified in the bond indenture at the time of issue of exchangeable debt.
The price of an exchangeable debt is the price of a straight bond plus the value of the embedded option to exchange.
Straight debt can be defined as a bond that does not give the investor the option to convert into equity of a company. In an exchangeable debt offering, the terms of the issue, such as the conversion price, the number of shares into which the debt instrument can be converted (conversion ratio), and the debt maturity are specified in the bond indenture at the time of issue. An exchangeable debt is simply a straight bond plus an embedded option which gives the bondholder the right to convert its debt security into the equity of a company that is not the debt issuer. Exchangeable debt is quite similar to convertible debt, the major difference being that the latter is converted into shares of the underlying issuer rather than shares of a subsidiary as is the case with exchangeable debt.

Exchangeable Debt

A fully convertible debenture is a debt security in which the whole value of the debenture is convertible into equity shares at the issuer's notice.

A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer's notice. The main difference between FCDs and most other convertible debentures is that the issuing company can force conversion into equity. The main difference between FCDs and most other convertible debentures is that the issuing company can force conversion into equity.

Fully Convertible Debenture (FCD)

Hung convertibles are convertible securities with share prices trading well below the conversion price, making conversion to common stock unlikely.

Hung convertibles are convertible securities where the share price of the underlying is well below the conversion price, making it unlikely that the securities will be converted into common stock. Hung convertibles are convertible securities where the share price of the underlying is well below the conversion price, making it unlikely that the securities will be converted into common stock. Hung convertibles are convertible securities where the share price of the underlying is well below the conversion price, making it unlikely that the securities will be converted into common stock. To solve the problem of a hung convertible, a company therefore would need to improve its fundamentals, such as revenue growth, operating margins or return on invested capital, to spur the common stock high enough to reach the conversion price. According to Calamos, the price of a convertible trading closer to its investment value, or the value of an equivalent non-convertible bond, will be more influenced by interest rates than one trading closer to its conversion value.

Hung Convertibles

An irredeemable convertible unsecured loan stock (ICULS) is a hybrid security that provides the benefits of a bond, paying fixed interest income until it is converted into shares of stock.

An irredeemable convertible unsecured loan stock (ICULS) is a hybrid security that has some qualities of a debt instrument and some characteristics of an equity warrant. The conversion price is the price at which ICULS can be converted into common shares, and it is determined by the conversion ratio. Like convertible bonds, ICULS can be converted into newly issued shares of common stock at a set conversion ratio and price. On the other hand, if the stock price is higher than the conversion price, the ICULS is in the money, and the holder receives the stipulated number of shares without having to pay any additional cost. If the current market price of the stock at the time of conversion is less than the conversion price (RM40, say, using the above example), the ICULS is said to be out of the money.

Irredeemable Convertible Unsecured Loan Stock - ICULS

A liquid yield option note (LYON) is a form of zero-coupon convertible bond that can be converted to common stock by either the holder or issuer.

The Origin of Lyons: A Case Study in Financial Innovation

Liquid yield option notes (LYONs) are a form of zero-coupon convertible bonds that allows the holder or issuer to convert the note into a fixed number of company shares. Due to the zero-coupon feature, the bond pays no interest and is therefore issued at a discount to par value, while the convertible feature means that bondholders have the option to convert bonds into common stock of the issuer at a certain conversion price. Liquid yield option notes (LYONs) are a form of zero-coupon convertible bonds that allows the holder or issuer to convert the note into a fixed number of company shares. A zero-coupon convertible is a fixed income instrument that combines the features of a zero-coupon bond with that of a convertible bond. LYONs have a predetermined conversion feature that allows either the holder or issuer to convert them to a fixed number of shares of common stock.

Liquid Yield Option Note (LYON)

A mandatory convertible is a type of convertible bond that has a required conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory convertible into the underlying common stock.

A mandatory convertible is a type of convertible bond that has a required conversion or redemption feature, rather than the convertible feature being an option. In actuality, two conversion prices are stated with a mandatory convertible – the first conversion price limits the price in which the investor would receive the equivalent of its par value back in shares, the second would delimit the price in which the investor will earn more than par. The application of mandatory convertible bonds is similar to that of mandatory convertible preferred shares, in which case, preferred shareholders must convert their shares to common stock at a specified date. The trust indenture lists the conversion price, which is the price at which the debt securities are convertible into common stock at a premium to the issue price upon maturity. A mandatory convertible is a type of convertible bond that has a required conversion or redemption feature, rather than the convertible feature being an option.

Mandatory Convertible

A provisional call feature allows an issuer, usually of convertible securities, to call the issue during a non-call period if a price level is reached.

A provisional call feature allows an issuer, usually of convertible securities, to redeem (call back) the issue during a non-call period if certain criteria, such as a price threshold, are reached. For example, a convertible bond may allow a provisional call of the issue if the underlying common stock trades at 120% of the conversion price for 30 consecutive days. A provisional call feature allows an issuer, usually of convertible securities, to redeem (call back) the issue during a non-call period if certain criteria, such as a price threshold, are reached. Soft call provisional protection is when the bonds can be called subject to the share price of the underlying common stock being above a certain level. A provisional call feature gives an issuer the right to accelerate the first redemption date if the underlying common stock trades at, or above, a pre-determined level for an extended period of time.

Provisional Call Feature

A revertible bond is a type of convertible bond that automatically converts to stock if that stock's price drops below a pre-determined price threshold.

A revertible bond, also known as a reverse convertible bond, or simply as "revertible," is a type of convertible bond that automatically converts to that company's common stock if that stock's price drops below a pre-determined price threshold. More stable companies would find it more challenging to offer revertible bonds, because the share price of their stock wouldn't be expected to fall, but also because there is virtually no risk to owning one of their corporate bonds, rendering it an extremely lopsided choice between bond and stock shares in terms of risk and potential reward. Revertible bonds refers to a special type of convertible corporate bond that automatically converts itself into shares of the company's stock in the event that the underlying stock drops below the conversion price. This feature is in contrast to a traditional convertible bond, which is a corporate bond that gives the bondholder the right, but not the obligation, to convert the bond into shares of that company's stock. If this is the case, it may make more sense to own shares of the company than to own a bond issued by the company, because it is much easier to sell shares of stock than it is to sell an illiquid bond.

Convertible Notes

More in Investing

Terms in Convertible Notes