Convertible Bond (CB)

1. Definition

A Convertible Bond (CB) is a type of fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. It is a hybrid security with debt- and equity-like features, often referred to as a "Mezzanine" instrument.

2. Structure & Features

2.1. Dual Nature

• As Debt: If not converted, the investor receives periodic interest payments (coupons) and the repayment of principal at maturity.
• As Equity: If the company's stock price rises significantly, the investor can convert the bond into stock to realize capital gains.

2.2. Conversion Price

The price per share at which the convertible security can be converted into common stock. * Refixing Clause: In some markets (like Korea), clauses may allow the conversion price to be adjusted downward if the stock price falls. This protects the bondholder but increases dilution risk for existing shareholders.

3. Incentives

3.1. For the Issuer (Company)

• Lower Cost of Capital: Companies can issue debt at a lower interest rate than standard bonds because the conversion option adds value for investors.
• Delayed Equity Issuance: If converted, debt turns into equity, improving the company's leverage ratio without the immediate negative signaling of a secondary stock offering.

3.2. For the Investor

• Downside Protection: The bond component provides safety through guaranteed principal and interest if the stock performs poorly.
• Upside Potential: The equity option allows participation in the company's growth if the stock price soars.