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    ja net 301's Avatar
    ja net 301 Posts: 1, Reputation: 1
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    #1

    Jun 2, 2008, 03:38 PM
    Debt convertibles
    First I would like to say hello to everyone. I am taking Finance trying to further my career in Business. But my question is :

    Why do companies chose convertible debt? Is that a wise choice?
    wingrun's Avatar
    wingrun Posts: 40, Reputation: 4
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    #2

    Jun 7, 2008, 01:04 PM
    It's a way for the company to save some money. The company issues convertible debt with the general idea that the bond won't be worth converting till maturity. This also gives the investor an additional incentive to purchase a convertible debt.

    So it basically depends which point of view you have. From an investor's point of view, convertible bond might sound a little more attractive to purchase. It also confirms the bond is liquid enough in case the lender (the purchaser of the debt) needs cash.

    As for the company who's issuing the convertible, they are required to pay less interest/coupon on the debt. Here's the breakdown on the interest rate:
    Real risk free rate of return + inflation premium + default risk premium + liquidity risk premium + maturity risk premium.

    By issuing convertible, they at least eliminate the liquidity risk premium hence owing less interest.
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