What are the advantages and disadvantages of convertibles to issuers? To investors?

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What are the advantages and disadvantages of convertibles to issuers? To investors?

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What are the advantages and disadvantages of convertibles to issuers? To investors?

Explanation & AnswerSolution by a verified expert

Explanation

Companies issue convertibles to lower nominal interest/dividends payment, especially if the company is considered by investors to be risky. Investors' required rates will be too high for these companies without the conversion feature.

Sample Response

The pros of issuing convertibles are:

Lower nominal rates attached to the bonds/preferred shares
Common stock would be issued through the convertible at a higher price than had it been issued when the convertible was issued

The cons of issuing convertibles are:

If stock prices soar, company will get a lower amount from conversion than from issuing shares at market price
Potential dilution of current voting shareholders

The pros of buying convertibles are:

Potential participation in extraordinary earnings and/or stock price increases by converting
Interest and principal would still be received if company's share price does not rise as expected

The cons of buying convertibles are:

Lower nominal rates attached to the bonds/preferred shares
Stock price may not go up beyond the conversion price

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