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Convertible securities

Convertible securities offer to owners the option to convert bonds into ordinary shares. Such securities are usually issued by young companies that have difficulties in financing of future projects and want to attract investors. For example if price of bond is 50€, and its nominal value is 1000€ , this means that a holder of bond can convert it into 20 shares (1000 / 50 = 20).

Conversion value of convertible securities is obtained by multiplying the current market price and the conversion ratio (the number of shares into which it can be converted, in our case 20). Thus, the increase in value of stocks causes the increase of conversion value. Therefore investors are financially protected, because if the market price rises, they will make a profit if they convert the bonds into shares. If the market value of shares is falling, they have the bonds which value should not be below nominal value.

Company may have interest to force investors to convert the bonds into shares. This can be done by decision to recall bonds, but with price less than the market price of shares. So better solution for investor is to convert rather then to accept a lower price of call. Another way to force conversion is to increase the dividend above the amount of interest on convertible bonds.

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