Lesson 6 of 7 · All lessons in this module
- Bullet, fully amortizing and partially amortizing bondsVideo lesson
- Sinking funds, waterfalls, zero-coupon and deferred coupon bonds
- Floating, step-up, credit-linked and PIK coupons
- Index-linked and inflation-linked bonds
- Callable and putable bonds
- Convertible bonds, warrants and contingent convertiblesVideo lesson
- Domestic, foreign and Eurobonds; tax considerations
Lesson 6 of 7 · 12 min
Convertible bonds, warrants and contingent convertibles
A convertible lets the investor swap the bond for a fixed number of shares, so it trades like a bond when the share price is low and like the shares when it is high; a CoCo converts automatically on the downside when a bank's capital runs short.
In short
- A convertible bond gives holders the right to exchange it for the issuer's common shares at the conversion price.
- Conversion ratio = par ÷ conversion price; conversion value = conversion ratio × current share price.
- The conversion price is typically set at a premium to the share price at issue; in return investors accept a very low coupon or yield.
- Share price far below conversion price → trades like a straight bond; far above → tracks conversion value.
- Warrants are attached, separately tradable options to buy shares.
- CoCos convert (or are written down) automatically if bank capital falls below a regulatory minimum; they pay a higher yield.
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