Research On Call Provision Of Convertible Bond

A convertible bond is a bond that can be exchanged for a predetermined fixed number of"new"shares of the issuing company within a predetermined period of time. In essence, a convertible is a package consisting of a straight bond and warrants written on the issuing company stock. Given the hybrid character of convertible bonds, we can determine that the risk level of bondholder will be between those for straight debt and equity.Most convertible bonds have call provisions, and most provisions have important qualifications or protection. This study analyses call provision including the strength and length of call protection, categorizes as no protection, soft protection, hard protection or absolute protection. No protection represents convertible bonds that are callable anytime, soft call protection has call provisions contingent on stock price behavior. For example, an issue that may be called if the stock price exceeds a specified level by 150 percent of 20 consecutive trading days is categorized as soft protection. The hard protection features unconditional call protection that takes effect following a period of hard protection. The absolute protection represents convertibles that are not callable under any circumstances.This paper researches on call provision of convertible bond in a legal perspective ,by using the approaches of cross-section research,Economic-Legal theory and demonstration.Apart from the preface and conclusion, this paper contains four sections:Section one, gives the general description of convertible bonds, including the concept, category, advantage of institutional design and developing path in western countries. Furthermore, introduces the history and current status of convertible bond in china.Section two, focuses on call provision of convertible bonds, including definition, function, legal nature and influence on convertible bond's value. Section three, analyses risk-benefit model of the issuer, shareholder and bond holder of callable convertible bond, in order to indicate their interests confliction around the call provision, especially on call policy. Then, use the Economic-Legal theory analyses call policy, for the purpose of determining why the issuers prefer to call late.Finally, in section four, based on the practical analysis of legal system relating call provision and the current call provision practice in china, presents conclusions and proposals, towards the aspects of call notice, call mode, and special call provision.After closely examined china's legal institutions and financial practices of call provision, we find there are many improvements can be made. This study is just a beginning and it is hoped to provide useful references to subsequent researches.