What is a mandatory convertible?

Unexpected convertible is a bond problem that includes the required or mandatory redemption or conversion function under the terms of bond sales. Unlike some other types of convertible bonds, the investor does not have the ability to choose from several options when the date of transfer is approaching. Instead, there is one specific procedure that will be launched at the date assigned in Bond conditions, or at an earlier moment if the bond is configured to allow the issuer to call the bond soon.

One of the more common structures for the mandatory convertible is to determine the conditions so that the investor transforms the bond into a ordinary share that is the basis of the bond. Until now, the investor will receive a fixed or variable interest rate on the problem of bonds. When the due date occurs, the final interest payment is calculated, the remaining part of the bond is transferred to the appropriate number of shares and issued to the investor.

with the acquisition of a compulsory convertible are connectedTwo benefits. First, the terms of the bond issue are very simple. Investors know exactly what to expect and when to be converted. As a result, it is much easier to project the rate of return and find out whether the bond is in fact a healthy investment in the long term.

Another important advantage for investors is that the typical mandatory convertible is structured to provide higher returns than other types of convertible bonds. This provides another incentive for investors to set out with the problem of bonds that offer nothing in the way, and allows only one final solution. Assuming that the value of shares per unit of shares, which was eventually issued to the investor's contributions at a good price and showed signs of the valuation, this yield can be quite considerable.

While there are benefits investment in a compulsory convertible, there are alsoThe disadvantages that need to be considered. Changes in market conditions can reduce the value of those that are the basis of shares during the bond life. This means that at the moment of conversion, the investor realizes less return. If market trends continue the same lines, there is a chance that the investor could eventually lose money for an agreement. For this reason, investors should not only closely look at the return on the bond maturation point, but also projected the probable level of performance of the underlying shares on this date of due date.