Covered Bonds
February 12, 2025
The Importance of Major Pairs The Forex market is a place where trading happens in all currencies. However, the volume of trade that is conducted in different currencies is very different. Hence, even though there are hundreds of currencies in the world, about two thirds of the massive $4 trillion dollar Forex volume is transacted […]
All of us have seen movies or have read novels wherein there are several witnesses who are describing the same crime scene. However, each of them describes the scene in different ways. This is because their experiences are colored with their own thought processes. This makes different people look at the same situation in different […]
What is Investment ? It is essential for every individual to keep aside some amount of his income for a secure future. The art of assigning some amount of money into something, which would benefit the individual concerned in the near future, is called as investment. Why Investment ? Investment helps an individual to save […]
The role of commercial banks is to act as trusted partners to their corporate associates. Over the years, the degree of trust has been steadily increasing. As a result, many corporations across the world are outsourcing critical parts of their business to banks. In the previous articles, we have already seen how certain payment functions […]
The banking system is the bedrock upon which the modern financial system stands. The banking system is highly integrated with the entire economy. Retail borrowers, small and medium enterprises, large companies as well as governments are all involved in borrowing money from banks at regular intervals. It is for this reason that the well-being of […]
In the previous article, we studied the concept of convertible debt and some of the common terms which are used while discussing convertible debt. In this article, we will have a closer look at some of the advantages and disadvantages of using this form of debt.
Many companies continue to use convertible debt. This is because it provides several advantages over plain vanilla debt bonds. The advantages have been explained in detail in this article:
Later, by the time, investors have exercised the option to convert the debt to equity, the company would be at a higher stage of growth. As such, the valuation that the firm would realize using convertible debt is more than the valuation which the firm would realize in other scenarios. Hence, many companies look at convertible debentures as a form of obtaining delayed equity financing.
Every financial instrument has its own pros and cons and convertible debt is no exception either. Some of the common disadvantages associated with convertible debt have been mentioned below:
The end result would be a large number of shareholders. Hence, from the next year onwards, the profit will be divided between a larger pool of investors. Hence, each individual investor would earn a smaller earning per share. If companies issue excessive convertible debt, they could face backlash from existing shareholders who would obviously be opposed to the idea.
Since these firms generally have a higher risk compared to other firms, the debt that they issue also tends to have a higher risk as compared to other firms. Hence investors who put their money in fixed income securities must be aware that their money is not as safe in convertible bonds as it would be in other bonds.
Hence, it would be fair to say that convertible debt offers a lot of advantages to certain types of firms. The disadvantages can also be significant. However, if a company is able to plan ahead, then it may be able to mitigate some of the risks that result from convertible debt.
Your email address will not be published. Required fields are marked *