GLOSSARY

LEARNING RESOURCES

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SPOTLIGHTTAP THE EXPERTSLEARNING RESOURCES

Conversion Ratio
Set at issue, the number of shares of common stock into which each bond may be converted.

Conversion Price
Set at issue, the conversion price may be calculated as follows:




Conversion Price
Set at issue, the conversion price may be calculated as follows:




Investment Value
Also known as the bond floor, the level at which a straight bond with the same maturity and credit risk would trade. Investment value effectively provides a "floor" for the price of the convertible if it loses all its equity content and trades as a fixed income instrument.

Investment Value Premium
The premium of the convertible market price above investment value, expressed as a percentage.

Delta
The price of a convertible is sensitive to movements in the underlying equity. Delta measures the rate of change of its price with respect to movements in the underlying common stock.

Gamma
This measures the rate of change of delta with respect to the underlying equity. If gamma is small, delta changes only very slowly; however, if gamma is large in absolute terms, delta is highly sensitive to equity movements.

Where Conversion Parity = (Conversion Ratio x Current Stock Price)

UNDERSTANDING A COMPANY'S CAPITAL STRUCTURE

A company’s capital structure refers to the way a corporation finances its assets through a combination of equity, debt or hybrid securities.

OVERVIEW OF BONDS

FEATURES & BENEFITS OF BONDS

RISKS OF BONDS

TYPES OF BONDS

FOUR COMPONENTS TO SELECTING CONVERTIBLE BONDS

Bond Price

The price of the bond will rise as the stock price approaches the conversion price.        

Conversion Ratio

The number of common shares the convertible holder has the option to convert into.

The conversion ratio is written in the original indenture when the security is brought to market by the issuer.

Example: Convertible security can be converted into 30 shares of common stock. Conversion ratio = 30.         

Volatility

Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value.

A higher volatility means that the price of the security can change dramatically over a short time period in either direction. 

A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

Bonds will become more volatility as its stock price moves up and down

Spread

The difference between the Convertible’s yield and the risk-free rate.

It is also the difference between the bid and the ask price of a security; for a stock option, it is the difference between the strike price and market value.

The spread is influenced by the supply or “float” (the total number of shares outstanding that are available to trade), demand or interest in a stock, and total trading activity of the stock.

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SPOTLIGHT TAP THE EXPERTS LEARNING RESOURCES

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