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Why would a company issue convertible bonds instead of stock

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Why would an investor buy convertible bonds instead of the underlying stock when the conversion price is higher than the stock price? Why would a company issue convertible bonds instead of new stock?

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Solution Summary

Your tutorial is 269 words and explains in everyday language (without technical terms) how a convertible bond works, why it is desired by investors and why companies issue them.

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If an investor wanted to own the stock, with all its upside and downside, they would buy the stock itself. Investors that buy a convertible bond wish to enjoy the benefits of a bond with the upside of the stock (and not the downside). A convertible bond pays an interest stream, whatever the bond issue specifies as the interest payment amount. The conversion feature usually permits them to offer a lower interest stream to the ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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