Convertible Bond Financing Theory And Practice

Convertible bonds is a kind of corporate bonds that underwriter issues in accordance with legal procedure and could be converted into shares of issue company in certain period based on agreed conditions. And it is kind of compound financial instruments that is intervenient of fixed income security and common bonds. Convertible bonds have the dual functions of investment and diversion from risk; therefore, it is favorite between underwriter and investors due to its unique strength compared with the pure bonds and shares.Convertible bonds financing is greatly appealing to the underwriters due to its lower cost of financing, premium issuance, deferred equity dilution and its good effect on the optimization of capital structure. Meanwhile, it also provides the investors with stable income of interest, payment of principal, and the possible value addition of equity as well. That's why convertible bonds are very popular. However, issuer also has to undertake great risks when they underwrite the convertible bonds, such as, issue risk, interest risk, and conversion risk. In particular, when it failed to be converted into shares, the underwriter will have to face huge risk in the financial crisis and even go bankrupt. Therefore, the underwriter should have a thorough consideration when they adopted convertible bonds for financing, such as the current operation of business, capacity of payment, the usage of capital, capital structure of the company, then they could select the right time for issuance with reasonable composition of article to meet the expectation of maximization of corporate valued.