1. Convertible Debt
Companies have to ways in raising money and financing their plans: issue debt or equity. Debt comes in the form of loans and equity in the form of shares. There is a wide range of methods for both ways, with different instruments and multiple options. In this study we will focus on debt and especially in convertible debt. A convertible debt is a loan that can convert to equity under certain circumstances, usually at the holder's discretion.
A convertible debt is usually issued in the form of convertible bonds, which is similar (but not the same) to a bond with warrants. A warrant is a certificate, usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price, (usually above the current market price at the time of issuance), for an extended period, anywhere from a few years to forever. A bond is a certificate of debt that is issued by a government or corporation in order to raise money with a promise to pay a specified sum of money at a fixed time in the future and carrying interest at a fixed rate. So, a convertible bond is a bond with warrants with the only difference that the latter can be separated into different securities whereas a convertible bond can't. A convertible bond gives the holder the right to exchange it for a given number of shares of stock anytime up to and including the maturity date of the bond (Ross, Westerfield, Jaffe, Corporate Finance).
Convertible bonds are hybrid instruments: they are never as good as bonds when yields fall and they never perform as well as stocks in a bull market , but they always deliver better returns than the mix of the two(Ahmed Talhaoui, Incisive Media Investments Ltd. 2005). From an is ...