What does the term convertible bond mean?

In simplified terms, the convertible bond can also be regarded or named as a typical bond. These bonds of public limited companies offer the respective company the possibility to obtain a pre-determined capital they need at favourable conditions. The repayment of this capital is subject to a fixed maturity. Strictly speaking, this convertible bond is almost equivalent to the normal taking up of a loan. However, the convertible bond offers clear advantages for the company, which means that almost all stock corporations prefer this type of investment. However, this possibility of using borrowed capital for the company’s own financing only requires a three-quarters majority in advance at the Annual General Meeting of the company concerned. Only under this condition may the possibility of the convertible bond be used.

What does the word change in the term convertible bond mean?

The term “convertible bond” is composed of the words “convertible bond” and “bond”. The upper part of this text already deals with the term “bond”. The term “change” will now be discussed in more detail. The debt capital used by the joint-stock company can be converted after the deadline or after the expiry of the previously fixed term. This is done in the form of shares. This means that the amount of borrowed capital determines how high the proportion of shares in this company is for the investor. So one can say that the investor buys practically temporarily a part of the company. However, as the latter is not a shareholder of the company for the duration of the repayment or the repayment period, this amount is initially referred to as debt capital. Only after this period can the debt capital be converted into shares. From this point on, the investor is also a shareholder of the respective joint-stock company. This is one of the main reasons why a three-quarter majority must be achieved in the run-up to the Annual General Meeting.

What are the advantages of such a bond for stock corporations?

The advantages of the convertible bond lie primarily in the interest rates. This is because the interest rate for a convertible bond is significantly lower than the interest rate that is customary for a bank. This means that the debt capital which can be used for a certain period of time is repaid almost one to one. Therefore, in this case one can also speak of a temporary bond that will be repaid to the investor with a cash bonus. However, this only applies if the debt capital is repaid within the specified period. If this is not the case, the possibility of change can be considered. Here too, however, the public limited company and the investor must be in agreement.

Conclusion on the convertible bond

The overall picture of the convertible bond is almost entirely positive. The only disadvantage of this variant is the time required to achieve a three-quarters majority in the Annual General Meeting in advance. As a rule, many public limited companies require a great deal of time to reach an internal agreement. In some situations this can be a significant disadvantage. However, we continue to be the main beneficiary of such a bond. First and foremost, of course, the low interest rates are to be considered here. For almost all stock corporations, these are the main argument in favour of this possibility. to decide. Therefore, it is not surprising that a large number of companies make use of this option.