Convertible Bonds
Chapters in this video
- 0:00 What a convertible bond actually is
- 1:52 Bondholder's option and the lower coupon tradeoff
- 2:22 Conversion price, ratio, and the par value formula
- 3:55 Parity price worked example at $1,100
- 4:49 Arbitrage and the bond's split personality
- 5:52 Investment value as the price floor
- 6:26 Forced conversion: the call price trick
- 7:31 Fixed vs variable conversion and rapid-fire recap
What this video covers
- Why conversion is at the bondholder's option, never the issuer's, and why convertibles pay a lower coupon than comparable non-convertible bonds
- How to calculate the conversion ratio using par value ($1,000) divided by the conversion price, and the inverse seesaw relationship between the two
- Why the conversion ratio is fixed at issuance and only adjusts for stock splits or stock dividends, never for market price swings
- How to calculate parity price of the stock (bond market price / conversion ratio) and parity price of the bond (stock market price x conversion ratio)
- How arbitrage snaps a mispriced convertible back to parity in three steps: buy the bond, convert, sell the stock
- Why investment value acts as a hard price floor even if the underlying stock collapses to zero
- What "forced conversion" really means: an economic mechanism through a call, not a direct mandate from the issuer
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