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Types of bonds

Convertible bonds

Bonds with conversion rights are called "convertible bonds". For a limited period of time, they give the lender the right to convert the bond into a predetermined number of equity securities such as shares. If the conversion right is exercised, the lender's status changes from that of a creditor (provider of outside capital) to that of a shareholder (provider of equity capital). If the conversion right is not exercised, the convertible bond behaves in the same way as a conventional bond. The option of converting it into equity securities constitutes added value for investors, so the interest rate is usually a little lower. The terms of the issue may also stipulate that the bonds have to be converted by a certain date.

Investors can benefit from investing in convertible bonds in a number of different ways. On the one hand, there is an unlimited potential for price gains in the event of rising shares prices; on the other hand, there is a limited risk of loss, because apart from the conversion right, a convertible bond is really the same as a conventional bond. Convertible bonds are typically issued by joint-stock companies.

The following criteria may be relevant to investors when buying convertible bonds:

Criterion Description
Preferential subscription right Under the Swiss Code of Obligations (CO), if convertible bonds are issued in the context of a conditional capital increase, they must first be offered for subscription to the company's existing shareholders in proportion to their existing stakes. This preferential subscription right may be restricted or denied on important grounds.
Yield The interest rate on convertible bonds tends to be a little lower than that offered by conventional bonds. The share price of the company whose shares can be subscribed influences the price of convertible bonds.
Conversion ratio The conversion ratio indicates how many equity securities (shares) the lender receives for a certain nominal value of the convertible bond. For example, if one convertible bond can be converted into 100 shares, the conversion ratio is 1:100.
Conversion period The period during which an investor can carry out a conversion is called the "conversion period". It usually begins some time after the time of issue (e.g. six months later) and often ends on the maturity of the convertible bond.
Conversion price The nominal value is often used to calculate the conversion ratio. However, the issuer may also use a higher or lower price, which results in a premium or a discount. The issuer specifies the conversion price when issuing the convertible bond, but the price may be adjusted later.
Anti-dilutive provisions Under the Swiss Code of Obligations (CO), when new conversion rights are issued, existing conversion rights may be diluted only if the same dilution applies to the shareholders. Otherwise, the conversion price must be lowered or other suitable compensation has to be given to the beneficiaries.
Call right The terms and conditions of the issue may stipulate that the bond issuer can call the convertible bond unilaterally once a certain share price is reached. In this case, the investor could be required to convert early. Other conditions are possible as well.