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CAPITAL MARKETS LAW
107
Convertible Bonds
4
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Att. Nilay Çelebi
General
Convertible bonds are fixed income instruments that the companies
may use for raising funds. They grant the investor the right to convert the
bonds into a fixed number of shares of the issuer under some conditions
at the option of investor. They are partially capital market instruments
with a fixed yield and partially a stock. The Convertible bonds are hybrid
security with debt (bond) - and equity-like (shares of stock) features and
are in between bonds and share certificates and provide the investor with
a upside potential of the underlying equity. When the share price goes up
then the value of the bond goes up, if the share price goes down then the
value of the bond goes down.
The Convertibles provide the investor with the benefit of debt
instrument that pay fixed coupons and can be redeemed at maturity at a
pre-determined price. Convertible bonds are addressed to the investors
that wish to benefit from the high yield of the stock market but do not
wish to face with the risk of the volatility movements in such markets.
They provide to the investors, the guarantee of payment of the principal
amount of the bonds on the maturity and the equity yield of the stock when
converted. The convertible bond issuer has the flexibility in pricing and
may raise fund with lower costs due to the fact that the right of conversion
with a fixed yield is given to the investors.
The interest rate of the convertible bonds is lower because the holder
can convert such bonds into shares of common stock in the issuing
company. The investors agree in these lower interest rates because of the
potential raise in the value of the shares of the issuing company.
Convertible bonds are one of the prominent financial products
that are traded in the security markets in Turkey and regulated under
the Communiqué on Principals Regarding Registration of the Debt
Securities with the CMB and Sale of Debt Securities Serial: II, No: 22
(“Communiqué”).
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Article of April 2011