What Is a Convertible Note?

Convertible bonds are bonds in which bondholders can convert bonds into ordinary shares of the company at a price agreed upon at the time of issue. If the bondholders do not want to convert, they can continue to hold the bonds until the principal and interest are collected at the end of the repayment period, or they can be sold and realized in the circulating market. If the holder is optimistic about the stock appreciation potential of the bond issuer, after the grace period, he can exercise the conversion right and convert the bond into stock at a predetermined conversion price. The bond issuer must not refuse. The bond interest rate is generally lower than that of ordinary companies, and the issue of convertible bonds by enterprises can reduce the cost of financing. Holders of convertible bonds also have the right to resell the bonds to the issuer under certain conditions, and the issuer has the right to compulsively redeem the bonds under certain conditions. ^[1]

Convertible bonds

Convertible bonds are bonds in which bondholders can convert bonds into ordinary shares of the company at a price agreed upon at the time of issue. If the bondholders do not want to convert, they can continue to hold the bonds until the principal and interest are collected at the end of the repayment period, or they can be sold and realized in the circulating market. If the holder is optimistic about the stock appreciation potential of the bond issuer, after the grace period, he can exercise the conversion right and convert the bond into stock at a predetermined conversion price. The bond issuer must not refuse. The bond interest rate is generally lower than that of ordinary companies, and the issue of convertible bonds by enterprises can reduce the cost of financing. Holders of convertible bonds also have the right to resell the bonds to the issuer under certain conditions, and the issuer has the right to compulsively redeem the bonds under certain conditions. ^[1]

Convertible bonds mean that the holder can convert them into a certain proportion or price within a certain period of time.

Convertible bonds have

There are several elements of convertible bonds, which basically determine the conversion conditions of convertible bonds,

Convertible bonds are more attractive to investors and issuing companies. It has both

There are two accounting methods for the issuance of convertible bonds:

One considers conversion rights as valuable and uses this value as

when

Other types

Since convertible bonds can be converted into stocks, it can make up for the low interest rate. If the market price of a stock exceeds its

Convertible bonds have the dual attributes of stocks and bonds, and are "privately guaranteed stocks" for investors. Convertible bonds have a strong market appeal to investors. The advantages are:

1. Convertible bonds give investors the lowest right to return.

The biggest difference between a convertible bond and a stock is that it has the characteristics of a bond. Even when it loses the meaning of conversion, as a low-interest bond, it still has a fixed interest income; at this time, investors can obtain Fixed principal and interest income. If the conversion is realized, it will receive income from the sale of common stock or dividend income. Convertible bonds have the advantage of "upper caps, lower bottoms" for investors. When the stock price rises, investors can convert the bonds into stocks and enjoy the profits brought by the rise in stock prices; when the stock prices fall, they do not need to implement conversions. And enjoy the annual fixed interest income and repay the principal when the term expires.

2. The current yield of convertible bonds is higher than that of ordinary shares.

Investors can obtain regular interest income while holding convertible bonds. Generally, the current yield of convertible bonds is higher than that of ordinary shares. If this is not the case, the convertible bonds will be converted into stocks soon.

3 Convertible bonds have priority over stocks.

Convertible bonds are subordinated credit bonds and have the same recourse rights as ordinary corporate bonds, long-term liabilities (bank loans), etc. in the order of repayment, but after common corporate bonds, they are the same as convertible preferred shares, preferred shares and ordinary Compared with stocks, they can get preferential liquidation status.

Initial recognition of convertible corporate bonds:

The convertible corporate bonds issued by an enterprise shall be divided into the debt components and equity components contained in the initial recognition. When performing the split, the fair value of the liability component shall be determined and used as its initial recognition amount. In order to pay the bonds, the initial recognition amount of the equity component is determined by the amount of the overall issue price after deducting the initial recognition amount of the liability component, and recognized as other equity instruments.

The transaction costs incurred in the issuance of convertible corporate bonds shall be apportioned between the liability component and the equity component in accordance with the relative proportions of the respective initial recognition amounts (relative fair value).

The enterprise should debit the "bank deposit" and other subjects based on the actual amount received, and credit the "bonds payable-convertible corporate bonds-face value" subject, based on the equity component. The fair value is credited to the "Other Equity Instruments" account, and the difference is debited or credited to the "Payable Bonds-Convertible Corporate Bonds-Interest Adjustment" account.

Convertible bonds are a relatively complex investment product. Investors should intervene only after they have clarified the operating mechanism, understood the corresponding terms, and become familiar with the trading rules.

Convertible bond pricing

The theoretical value of convertible bonds is the sum of the value of pure bonds and the value of complex options. The influencing factors mainly include the price of the underlying stock, the conversion price, the size of the underlying stock and the converted bond, the historical volatility of the underlying stock, the duration of various options included, and the market is risk-free Interest rate, yield to maturity of corporate bonds with the same qualification, etc. The value of pure bonds can be calculated by discounting the future cash flow of the converted bonds. The value of complex options can be determined using quantitative methods such as binary trees and stochastic simulation, mainly the comprehensive value of redemption, resale, correction, and conversion options. The relationship between the theoretical value of convertible bonds, the value of pure bonds, and the value of convertible bonds is that when the underlying stock price falls, the convertible bond price approaches the value of the pure bond, and when the underlying stock price rises, the convertible bond price approaches the convertible value, and the convertible bond price is high. The portion of the value of the pure debt is the market price of the complex options contained in the convertible bonds. The investment income of convertible bonds mainly includes coupon interest income, bid-ask spread income, and quantitative arbitrage income.

Convertible bond trading methods

Convertible bonds are subject to T + 0 transactions. The entrustment, trading, custody, transfer custody, market reveal, and transaction time are handled with reference to A shares. The convertible bonds are terminated ten trading days before the end of the conversion period, and the exchange will announce it one week before the termination of the transaction. Can be transferred to escrow, refer to the A-share rules.

• transaction fee

Shenzhen Stock Market: Investors should pay commissions to brokers. The standard is 2 of the total transaction amount. If the commission is less than 5 yuan, it will be charged at 5 yuan.
Shanghai Stock Exchange: Investors must entrust brokers with transaction fees to buy and sell convertible corporate bonds, RMB 1 per transaction in Shanghai and RMB 3 per transaction in different locations. When handling the settlement after the transaction, the investor shall pay a commission to the brokerage firm. The standard is 2 of the total transaction amount. If the commission is less than 5 yuan, it shall be charged at 5 yuan.

• Purchase route

The purchase of convertible bonds is relatively new to most investors, and investors can directly or indirectly participate in convertible bond investments in several ways. First, you can directly purchase convertible bonds just like buying new shares. For specific operations, enter the code, price, quantity, etc. of the convertible bonds, and confirm them at the end. The face value of convertible bonds is 100 yuan, and the minimum unit to purchase is 1 lot (10 cards). Industry insiders said that because one lot of convertible bonds requires less capital to buy, so there are more allocations, and the probability of one lot is higher than the purchase of new shares. Second, in addition to direct purchases, investors obtain pre-emptive rights by purchasing underlying stocks in advance. Because convertible bond issuance generally gives priority to old shareholders, investors can buy stocks before the equity registration date, and then exercise the right to obtain convertible bonds. Third, in the secondary market, as long as investors have a stock account, they can buy and sell convertible bonds. The specific operation is similar to buying and selling stocks.

Key points of convertible bond operations

According to exchange regulations, when a company that issues convertible corporate bonds is listed on its stock, the listed convertible corporate bonds can be converted into the company's shares. There are three main steps in the conversion.
The first is to apply for a conversion. An investor's application for stock conversion is made through an offer through the stock exchange trading system.
Based on security considerations, when investors are preparing to convert into stock, it is best not to perform the conversion process through telephone entrustment or online trading, but to fill in and submit a conversion application at the securities business department hosted by the conversion bond.
Then accept the application and implement the conversion. After the stock exchange receives the offer and confirms that it is valid, it deducts the amount of the investor's bonds and adds the corresponding amount of the investor's shares.
According to the existing regulations, the application for conversion of shares cannot be cancelled.
Finally, the stock exchange of the conversion stock. The converted shares can be listed for trading on the next trading day after the conversion.
In order to facilitate investors to settle the balance of funds in a timely manner, the balance of the convertible bonds that is insufficient to convert one share shall be paid in cash by the listed company on the same day through the stock exchange. ^[3]