Disadvantages of Convertible Bonds

Convertible bond is a debt security that can be converted into the common stock of the issuing company at a later date, subject to certain restrictions. This type of investment can offer some disadvantages / drawbacks to the issuers and investors, such as the follows:

1) A convertible bond is riskier. If the issuing company goes into bankruptcy, the holder of the bond has a lower priority claim on the company's assets, after the secured debt holders have been paid off.

2) Convertibles are traded at a premium to the current trading price. In order to make the conversion effective, investors have to allow the stock to reach the conversion price.

3) Bond holders usually receive substantially lower yield to maturity in comparison to the non-convertible bonds.

4) Convertible bonds are complex securities and have the characteristics of both bonds and stocks that may be confusing for decision making.

5) A disadvantage for the issuing company is that such financing runs the risk of diluting the EPS of the company's common stocks, and also the control of the company.

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