What is a Convertible Security?

Convertible securities are bonds issued by listed companies that can be converted into stocks under certain conditions. For a listed company to issue convertible bonds, a shareholders' meeting must make a decision, formulate corporate bond offering methods, specify specific conversion conditions and conversion methods, and report to the securities regulatory department of the State Council for approval. ^[1]

Convertible securities

Meaning of release

Save on distribution costs (

1. Yes attached

Theoretical value: formulas and actual calculations

Conversion value: Only when the stock price rises to the bond's conversion value is greater than the theoretical value of the bond, investors will exercise the conversion right.

Market price: when market price = theoretical price (conversion parity); when market price> theoretical price (conversion premium); when market price <theoretical price (conversion discount).

Convertible securities value

Convertible securities give investors the option to convert their debts or preferred shares into ordinary shares at a prescribed price and proportion within a prescribed period of time. Convertible securities have two values: theoretical value and conversion value.

(1) Theoretical value. The theoretical value of convertible securities refers to the value when it is regarded as a security that does not have conversion options. To estimate the theoretical value of convertible securities, we must first estimate the necessary rate of return of non-convertible securities with the same credit and similar investment characteristics, and then use this necessary income to calculate the present value of its future cash flows. We can refer to the bond valuation section in the first section of this chapter.

(2) Conversion value. If a convertible security can be transferred immediately, the product of the market value of the convertible ordinary stock and the conversion ratio is the conversion value, that is,

Conversion value = common stock market value × conversion ratio

In the formula: the conversion ratio is the number of shares that can be converted by each bond holder.

Convertible Securities Market Price

The market price of a convertible bond must remain above its theoretical value and conversion value. If the price is below the theoretical value, the price of the security is undervalued, which is clearly visible; if the price of the convertible security is below the conversion value, it is profitable to purchase the security and convert it immediately into a stock, thereby increasing the price of the security Until the conversion value. To better understand this, we introduce the concept of conversion parity.

(1) Conversion parity.

Conversion parity is the price per share that convertible securities holders can use to convert bonds into ordinary shares of the company during the conversion period, unless specific circumstances such as the sale of new shares, rights issues, bonus issues, dividends, share reductions and mergers, In the case of company mergers and acquisitions, the conversion price is generally not adjusted. The conversion ratio mentioned above is essentially another way of expressing the conversion price.

Conversion Parity = Market Price / Conversion Ratio of Convertible Securities

Conversion parity is a very useful number because once the actual stock market price rises to the conversion parity level, any further rise in the stock price will definitely increase the value of the convertible securities. Therefore, conversion parity can be regarded as a breakeven point.

(2) Conversion premium and conversion premium.

Generally, investors pay a conversion premium when purchasing convertible securities. The conversion premium per share is equal to the difference between the conversion parity and the current market price of the common stock (also known as the benchmark stock price), or when the convertible securities holder converts the bond into stock, compared to the stock at the time of the subscription The price (that is, the benchmark winning stock price) is usually expressed as a percentage of the current market price, the formula is:

Conversion premium = (conversion parity-benchmark stock price) × conversion ratio

Conversion premium ratio = Conversion premium / base stock price

If the conversion parity is less than the benchmark stock price, the difference between the benchmark stock price and the conversion parity is called the conversion discount, and the formula is

Conversion discount = (base stock price-conversion parity) × conversion ratio

Conversion discount ratio = conversion discount / base stock price

The emergence of conversion discounts is related to the premium sale of convertible securities.

(3) Conversion period.

The convertible securities have a certain conversion period, which means that the holder of the securities has the right to convert the held convertible securities into company stocks within that period. The conversion period usually starts from a few years after the issue date to the debt maturity date.

[Example] A company's convertible bonds have an annual interest rate of 10.25%, which matures on December 31, 2000. Its conversion price is 30 yuan, its stock price is 20 yuan, and the bond price is 1,200 yuan.

Conversion rate = 1200/30 = 40

Conversion premium = (30-20) × 40 = 400

Conversion lift ratio = 10/20 = 50%

Xinhuanet, Hong Kong, July 12 (Reporter Lin Jianyang) Sino-Ocean Land submitted an announcement to the Hong Kong Stock Exchange on the evening of the 12th, announcing that it plans to conduct an international sale of convertible securities and is expected to raise US $ 650 million. The company will also choose to increase the amount of funds raised to 900 million US dollars.

The announcement said that the initial conversion price of the convertible securities is expected to be HK $ 6.85 per share, and it is expected to distribute 8% annually and biannually. Sino-Ocean Land will introduce the convertible securities of this sale to institutional investors from now on.

The announcement also said that Sino-Ocean Land plans to use the proceeds to fund new and existing projects, including construction costs and land costs, and will also provide funds for general corporate purposes.

Sino-Ocean Land closed at 5.94 Hong Kong dollars, up 0.34%

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