Securities :

Bonds & Stocks

Avni K Madan
Content Various Types of Convertible Securities

Convertible Bond

Convertible Preferred Stock

Warrants
Various Types of Convertible Securities

Warrant

Convertible
Capital
Preferred
Note
Stock

Convertible
Security

Convertible
Rights Issue
Bond

..
Convertible Bonds
 Give their owner the right to exchange the bonds for a set quantity of some other asset. This
other asset is normally shares of stock in the same company.
 Conversion Ratio : No of Shares bondholder receives per 1000 USD par value Bonds
 Conversion Price =par value / Conversion ratio
 Conversion Value = Conversion Ratio X Current Stock Price
 Premium over conversion value = Market Price – Conversion Value
 Over a period of time, a convertible bond will increasingly act like a stock or non convertible
bond
 Busted Convertible : Bond whose conversion price is substantially above the current market
price of the associated common stock.
 Common Stock Equivalent : A convertible ( bond) in a company whose common stock has
appreciated.
Metamorphosis of a Convertible Bonds
Common Stock
Acts Like Stock Equivalent

Conversion Price
S
T
O
C
K
New Convertible Bond
P
R
I Declining or slow rising
C stock price
E
Common Stock
Equivalent
Acts Like Bond
Pricing of Convertible Bonds
 Convertible Bonds should never sell for less than their convertible value
 With a Busted Convertible, the conversion feature has little value
 Convertible bonds provide for upside potential while reducing downside risk
 Premium payback period : is the time required for the enhance income from the bond ( relative
to the equivalent number of stock shares) to offset the premium over the conversion value
 Break Even Time : Premium payback period is also called break-even time

Market Price Conversion = market value / conversion Ratio

Premium Payback Period =

(Market Conversion Price-Stock price)___
Bond Interest –(conversion ratio X Dividend per share)
Conversion Ratio
Why Companies issue Convertible Bond
 Convertible Bonds can be offered at a lower interest than would otherwise be required
 All Converted Bonds are Callable . If Called , a convertible bond must be (either)
 Sold
 Redeemed
 Converted
 Corporates like to issue convertible bonds because of the likelihood that they never have to
repay the debt
 Some Unusual Features
 Few Convertible bond do not pay interest twice an year but monthly or quarterly
 Some convertible bonds are are convertible to cash rather than security
Convertible Preferred Stock
 Preferred Stock is attractive to Corporations because of tax-exempt Nature of most dividend income
 From Investment Perspective : Fixed income security
 Annual Dividend
 Fundamentals of Conversion are same as convertible Bonds
Warrant
 A Warrant is a non dividend paying security giving its owner the right to buy a certain number of shares
at a set price directly from issuing company
 Warrants have no voting rights
 Outside US, warrants are issues in conjuction with new debt issue thus enabling a lower rate of interest
than otherwise required for that issue.
 Warrants can be detachable or non detachable
 Exercise Price : price at which investor holding warrants may buy the underlying asset
 In-the-money : When stock price rises above the exercise price and has intrinsic value
 Out-of-the-money : When stock price is below the exercise price
 Speculators buy warrants because of their leverage.
 Business Plans

Plan 01 Plan 03
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Our
Plans
Plan 02 Plan 04
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Our Brand Don’t Fall
Short When The Medium
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Securities
Security

Mutual
Stocks Bonds Options Commodities
Funds

Common
Stock

Preferred
Stock
Pricing Plans
Basic Plan
100
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Premium Plan
150
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Platinum Plan
200
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Marketing Strategy

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Thank You
Stocks
 People buy Stocks to better a better
Preferred Common
return than Saving Account or Stock Stock
government Bonds
 Corporates do not have to repay
Priority is getting
money a stockholder pays for a dividends over
stock Common
 Dividends are not Mandatory Stakeholders
 In return Stockholder gets voting
rights
 Investor buys stock for
 Stock Value appreciation Limited Rights
 Dividend
 Increased Value through Split

Preferred Common
Bonds
Stocks Stocks
Offer Shopping