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Why would an investor prefer a convertible bond?
By this logic, the convertible bond allows the issuer to sell common stock indirectly at a price higher than the current price. From the buyer’s perspective, the convertible bond is attractive because it offers the opportunity to obtain the potentially large return associated with stocks, but with the safety of a bond.
Why do firms issue convertible bonds instead of straight debt or equity?
Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond’s conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.
Are convertible notes good?
Convertible notes avoid placing a valuation on the startup, which can be useful particularly for seed stage companies which have not had enough operating history to properly set a valuation. Convertible notes are good bridge-capital or intra-round financing options.
What are the disadvantages and advantages of convertible bonds?
Convertible bonds are safer for the investor than preferred or common shares; they provide asset protection, because the value of the convertible bond will only fall to the value of the bond floor. A primary disadvantage of convertible bonds is their liquidity risk.
Why would a company choose to use convertible bonds for financing rather than a straight bond?
Convertible bonds offer lower interest rates than comparable conventional bonds, so they’re a cost-effective way for the company to raise money. Their conversion to shares also saves the company cash, although it risks diluting the share price.
Why are convertible notes good for investors?
Convertible notes allow issuers to defer valuation negotiations until a subsequent round of financing. The convertible note discount rate allows investors to convert the amount of their loan, plus accrued interest, into equity at a reduced price relative to the investors in that subsequent round.
What is one disadvantage of investing in convertible bonds?
A primary disadvantage of convertible bonds is their liquidity risk. In theory, when a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument.