What is a ‘Spur Put Convertible’
Premium put convertibles are debt securities which allows the bondholder to reclaim the bond at a premium before its maturity date. This redemption may meet with if its market price equals, or surpasses, an agreed-upon strike price. The manacles is also convertible to stock at a conversion rate outlined in the prospectus.
Discontinuing DOWN ‘Premium Put Convertible’
A premium put convertible bond gives the bondholder an chance to gain from upward movement of the underlying asset. Downside over comes in the form of the coupon, which is generally lower than a comparable vanilla contract. The put option also provides the bondholder with protection against a degeneration in the market value of the bond, if the investor is unwilling to wait for redemption at adulthood.
A bond is a fixed income investment where an investor loans coins to an entity, typically a corporation or the government. These entities borrow the funds for a clarified period at a set interest rate. The bondholder becomes the creditor to the issuer. The coupon is the annual involvement business rate the borrower will pay for the use of the funds.
Hedge funds will use convertible put bonds to square short positions in an underlying stock.
Pros and Cons of Premium Put Convertibles
- A put option gives the owner the to be honest, not the obligation, to sell a security at a specified price within a specified at all times. Like a put option contract on a stock, this feature includes a bash price. The strike price is a value at which a specific derivative undertake can be exercised. When the security reaches the strike, the investor may redeem the link before the maturity.
- The convertibility trait allows the bondholder to convert the connection into an agreed-upon number of shares of the underlying stock. The ratio at which the compact exchanges for shares is the conversion ratio. The conversion ratio is determined at the span of issue and has an impact on the relative price of the security. The conversion involves no interchange of cash or funds, only shares of the underlying asset. If the structure of the ties is an American-style exercise, the bondholder may convert at any time. European-style exercise countenances the conversion only upon maturity.
Example of Premium Put Convertible Handcuffs
An investor who owns an American-style premium put convertible bond with a masquerade value of $1,000, a coupon rate of 4%, and a put feature at a strike evaluate of $1,200. The bond’s conversion is to the underlying sock of XYZ company at a ratio of 10:1.
With one year red before maturity, the bond reaches its strike price of $1200. The investor may limber up the put option, and sell the bond back to the issuer at $1,200. They compel receive a premium to the $1000 par value plus the remaining year of influence. Alternately, the bondholder may convert the bond to 100 shares of XYZ stock. If the XYZ interest price goes above $120 per share, this would be an pulling option.