Convertible Bond, called convertible corporate bond, originated in the United States in 1843. Refers to the corporate bonds issued by the issuer according to legal procedures and can be converted into shares within a certain period of time according to agreed conditions. That is to say, convertible bonds, as a kind of corporate bonds, investors have the right to convert them into a certain number of ordinary shares of bond issuing companies (hereinafter referred to as benchmark shares) according to a certain proportion and corresponding conditions within a specified period of time. Therefore, convertible bonds are a kind of bond with rights, which not only contains the characteristics of ordinary bonds, but also has a series of elements such as face value, interest rate and term. It also includes the characteristics of equity, which can be converted into benchmark stocks under certain conditions; At the same time, it also has the derivative characteristics of the benchmark stock.
investment value
As a kind of mixed securities, convertible bonds' value is influenced by many aspects. The investment value of convertible bonds mainly lies in the bond's own value and conversion value. The value of the bond itself is the guaranteed income of convertible bonds, which depends on the comparison between coupon rate and market interest rates and the face value of the bond. Since the interest income of convertible bonds is fixed, discounted cash flow method method can be used to determine the value of bonds, and the key to its valuation is to determine the discount rate. The conversion value is also called call option value, that is, it gives investors the right to convert the benchmark stock into the benchmark stock when the benchmark stock rises to a certain price, which is reflected in the conversion income of convertible bonds.
The value depends on the comparison between the conversion price and the market price of the benchmark stock, as well as the company's future profitability and development prospects. The conversion value generally adopts binary tree pricing method, that is, first, based on the issue date, the possible price and probability of the benchmark stock on the start date of conversion are simulated, then the option value at various possible prices is determined, and finally the expected value of the option value is calculated and discounted. In addition, the investment value of convertible bonds is also affected by its conversion period, redemption conditions, resale conditions and downward revision terms of conversion price.
Generally speaking, the value of bonds themselves will be lower than the market price of convertible bonds. The difference is the bond premium, which is the cost that investors pay for the right to convert convertible bonds into stocks in the future. The income of this right is uncertain, which is determined by the future trend of the benchmark stock. Bond premium is used to measure the higher risk of investing in convertible bonds than investing in similar corporate bonds. The higher the bond premium, the greater the losses that convertible bonds may face in the future. The conversion value will not be higher than the market price of convertible bonds (the difference is called conversion premium), otherwise investors can simply buy convertible bonds-convert them into stocks-and sell them to obtain risk-free arbitrage income. The conversion premium is used to measure the chances of future convertible bonds benefiting from being converted into shares for sale. The greater the conversion premium, the smaller the chance of convertible bonds benefiting from conversion into stocks, and the greater the chance of vice versa.
By comparing the investment value of convertible bonds with the market price, we can determine whether the convertible bonds have investment value and decide whether to sell or buy convertible bonds.