Convertible Bond

A convertible bond is a bond with a conversion right that allows the bond to be converted into shares of the issuing company under certain conversion conditions. Until the conversion right is exercised, it is identical to a regular bond, but if exercised, the bond can be converted into shares. In short, it can be seen as a bond that can transform into stock.

From an investor's perspective, investing through convertible bonds allows repayment of principal and interest, reducing the risk of losing the invested principal. Also, since conversion into stock is possible depending on the situation, investors can achieve higher returns than when holding bonds if the company grows.

Then what effect does issuing convertible bonds have on the issuing company's financial statements? Assuming a convertible bond with the most common terms, the effects on assets, liabilities, and equity are as follows. Note that this is summarized based on the general corporate accounting standards applied to most early-stage startups.

1. At issuance of the convertible bond: Since a convertible bond has both debt and equity characteristics, issuing it increases assets (investment funds), liabilities (bond portion), and equity (conversion right consideration) all at once.

2. At interest payment: Because interest is paid, assets decrease and liabilities increase.

3. At exercise of the conversion right: Because the bond is converted into stock, liabilities decrease and equity increases.

4. At maturity redemption (unexercised conversion rights): Because the bond is redeemed in cash, assets and liabilities decrease.

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Topics: Mezzanine, Bonds with Warrants, Exchangeable Bond
Up: Mezzanine
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Category: Wiki/Economy