Because of its convertibility, when the underlying stock price rises, the bond price will also rise, and there is no limit to the rise and fall.
Because convertible bonds can be converted into stocks, it can make up for the low interest rate. If the market price of a stock exceeds its conversion price during the conversion period, the bondholder can convert the bond into a stock to obtain greater income. In addition to the interest rate of convertible bonds, the most critical factor affecting the income of convertible bonds is the conversion conditions of convertible bonds, which is also commonly known as the conversion price, that is, the face value of convertible bonds required for conversion into one share.
Due to the linkage between the price of convertible bonds and the stock price, when the stock rises, the yield of purchasing convertible bonds is the same as that of investing in stocks. However, when the stock price falls, the risk of convertible bonds is much smaller than that of stocks because of the guaranteed bottom of ordinary bonds.
Extended data:
Bond conversion:
When bondholders convert into stocks, there are two accounting methods to choose from: book value method and market value method.
1. The book value method is adopted, and the book value of the convertible bonds is regarded as the renewal value, and the conversion gains and losses are not recognized. Furthermore, the purpose of issuing convertible bonds is to convert bonds into stocks. The issuance of shares and the conversion of bonds are a complete transaction, not two separate transactions, and profits and losses should not be recognized when converting shares.
2. Under the market price method, the value basis of the exchanged shares is the more reliable market price or the market price of the converted bonds, and the conversion gains and losses are confirmed. Using the market price method, the confirmation of shareholders' rights and interests also conforms to the historical cost principle.
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