The convertible bond is a type of financial asset of mixed type. Halfway between what is considered fixed and variable income. Convertible bonds have the particularity that there is the possibility of converting them into newly issued shares. In other words, holders of convertible bonds can transform them into shares if a capital increase occurs in the company in question and, therefore, the issuance of new shares. Convertible bonds therefore grant higher rights to their bearers than normal bonds.
As with another type of bondsConvertible bonds ensure the return of the nominal amount of the bond, in addition to the periodic payment of interest. But they have the peculiarity that their expiration you can choose to convert the bond into shares or not.
The possibility that these bonds have to become shares means that they can only be issued by private companies, since companies and institutions of the public sector cannot issue shares. In addition, this same possibility is what makes the interest on convertible bonds lower from the start. Since later it is possible that the rise in prices in the shares can be taken advantage of. To obtain a higher return on the convertible bond.
Types of convertible bonds
Convertible bonds can be classified into two types depending on whether or not their conversion is mandatory:
- Voluntary conversion bonds: those in which the holder chooses whether or not he wishes to convert the bond into shares. It is the most recommended option since if the conversion is not profitable you can choose not to do it.
- Mandatory conversion bonds: those whose information brochure expressly includes the obligation to carry out the conversion. Its acquisition is only recommended to investors who are experts in the field.