Convertible is a bond exchangeable, at the option of the holder, for ordinary shares of the issuing company. Companies issue convertible debt is the decision to issue new equity, convertible and fixed income securities to raise capital is driven by a few factors. The transition from one form, state or mentality to another characteristic also gives them the characteristics of stocks. It is a combination of two things: safety, money owed, and fairness. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay Convertibles are basically bonds with a call option on the shares attached. Convertible bonds are legal debt documents that can be converted into company shares at a future date. Their security has characteristics of debt and equity. It pays occasional coupon interest just like any other dent in an object used to measure something. When redeeming the bonds, the bonds may elect to receive company stock rather than cash. Warrants are the option that allows the holder to purchase shares at a fixed price, thus providing a profit if the share price increases. Some bonds are issued with warrants. As with convertibles, warrant bonds have lower coupon rates than straight bonds. For the bond there is a preset ratio of transition from one form, state or mentality to another such that the bondholder will obtain a set number of common shares for each bond redeemed. A bond issuer cannot remove the option. For example, if a bond is both callable by the bond issuer and convertible by the bondholder, the issuer could call the bond and force the bondholder to sell the bond at the redemption price or convert it into common stock. The first or most important reason to issue convertible bonds is that it is an indirect means of issuing shares at a higher or higher price to be converted into common shares. It is useful when the business wants a permanent rather than a time-limited expectation of capital. However, it can rightly be argued that there is more risk to the firm with the issuance of convertible bonds than with the direct issuance of common stock. the interest rate can be fixed with respect to a simple bond. This results in a saving of cash paid as interest as well as a reduction in recorded (accounting) interest expense for the period. Thus, if the straight bond costs 0.10 and the convertible bond costs 0.04, $1,000,000 of straight bond would have a recorded interest cost of $100,000 and the convertible bond would have an interest cost of $40,000. These are accounting measures of cost and not the cash-based cost that should be the basis of the decision when choosing between convertible bonds and straight bonds. The opportunity for a firm to force conversion arises when the value of the bond is greater than the price of the call. Usually a price buffer should reduce the likelihood that the firm will pay cash. Issuing convertible bonds helps a company obtain equity financing in a delayed manner, as it takes time for bondholders to exchange their bonds for shares. This process delays the dilution of common stock and earnings per share. Companies can sell bonds at a lower coupon rate than a standard bond because of the option to purchase shares. The more valuable the feature is.