• Convertible Bond

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 Types of business entity - Peru

1 Those conditions state there must be a

primary public offering of shares or
convertible bonds in stocks, which are
held by more than 750 shareholders,
more than 35% of its capital belonging
to 175 shareholders, or that all
shareholders entitled to vote approve
the adjustment to the scheme

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 SK Telecom - China

1 In 2006, SK Telecom bought $1 billion worth

of convertible bonds of China Unicom Hong
Kong, a China Unicom enterprise and agreed
to cooperate in joint sourcing of handsets,
development of additional services, platform
development, marketing and distribution,
customer relationship management, and
network development. One result of this
partnership is jointly developing handsets to
be sourced by Samsung, LG, and Motorola.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 ISO 10962 - Structure of CFI Code

1 The second character refers to specific

groups within each category. For example,
the subdivisions of the Equities category
are: ordinary shares, preferred/preference
shares, units, and others, while for the
Debt instruments category, the
subdivisions are: bonds, convertible
bonds, money market instruments, and
others.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 CBSSports.com - SportsLine

1 In 1998, SportsLine raised $150

million in a secondary offering and in
1999 raised $150 million in a
convertible bond offering

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Rio Tinto Group - Chinalco investment

1 The proposed investment structure

reportedly involves $12.3billion for the
purchase of ownership interests of Rio
Tinto assets in its iron ore, copper, and
aluminium operations, plus $7.2billion for
convertible bonds

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 Rio Tinto Group - Chinalco investment

1 Rio Tinto is believed to have pursued this

combined asset and convertible bond
sale to raise cash to satisfy its debt
obligations, which require payments of
$9.0billion in October 2009 and
$10.5billion by the end of 2010. The
company has also noted China's
increasing appetite for commodities,
and the potential for increased
opportunities to exploit these market
trends, as a key factor in recommending
the transaction to its shareholders.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 1worldspace - Bankruptcy

1 The company filed for Chapter 11

bankruptcy protection on Friday,
October 17, 2008. The reorganization
includes a 90-day $13 million debtor-in-
possession financing approach, with the
hopes of obtaining added funds to repay
senior secured notes and convertible
bond|convertible notes. The company's
wholly owned India affiliate was not
covered by the bankruptcy
filing.Aviation Week Space Technology
Vol. 169 No. Oct 16, 27. 2008, WorldSpace
Bankruptcy, p. 19.
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 International Finance Corporation - Investment services

1 The portfolio is widely distributed across all regions

including Africa, East Asia, South Asia, Eastern Europe, Latin
America and the Middle East, and recently has invested in
Small Enterprise Assistance Funds' (SEAF) Caucasus Growth
Fund,[
http://www.ifc.org/ifcext/pressroom/IFCPressRoom.nsf/0/2
412B48CEDCF3A1B852579D1004E0DC0 IFC, Partners Support
Small and Medium Enterprises in the Caucasus] Aureos
Capital's Kula Fund II (Papua New Guinea, Fiji, Pacific
Islands)[
http://www.ifc.org/ifcext/spiwebsite1.nsf/0/0A26EA152DE53
C18852576BA000E2CA9 IFC Kula Fund II] and Leopard
Capital’s Haiti Fund.[
http://www.ifc.org/ifcext/Pressroom/IFCPressRoom.nsf/0/0
64AE6000F1E9D8A852579CD00517278 IFC's First Private
Equity Investment in Haiti Supports Reconstruction and Job
Creation] Other equity investments made by the IFC include
preferred stock|preferred equity, convertible
bond|convertible loans, and participation loans
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Hedge funds - Structure

1 The prime broker acts as a counterparty to

Derivative (finance)|derivative contracts,
and lends securities for particular
investment strategies, such as Long/short
equity|long/short equities and Convertible
arbitrage|convertible bond arbitrage

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Suzlon Energy - History

1 It has to redeem 500 million worth of

FCCB's(foreign currency convertible
bonds)in 2012 in tranches of 300
million in June and 200 million in
October respectively.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Japanese asset price bubble - Changes in the bank behaviour

1 convertible bonds,
bonds with Warrant
(finance)|warrants etc.)

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Bain Capital - Sankaty Advisors

1 With $15.7 billion of assets under

management, Sankaty invests in a wide
variety of securities, including leverage
(finance)|leveraged loans, high-yield
bonds, distressed securities, mezzanine
debt, convertible bonds, structured
products and equity investments

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 CIBC World Markets - Sale to Oppenheimer Co. (Fahnestock Viner)

1 Investment Banking, Corporate Syndicate,

Institutional Sales and Trading, Equity
Research, Options Trading and a portion
of the Debt Capital Markets business
which includes Convertible Bond Trading,
Loan Syndication, High Yield Origination
and Trading as well as related operations
located in the UK, Israel and Hong Kong

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 KBC Bank - KBC Bank NV

1 KBC Bank also has investment banking

operations in Europe, US and Asia. A
specialist arm called KBC Financial
Products operates primarily in global
convertible bonds; its branch in Japan is
called KBC Securities Japan, which
specialises in secondary equity broking,
convertible bonds, warrants, and equity
derivatives.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Private equity - Growth capital

1 PIPE investments are typically made in

the form of a Convertible
bond|convertible or preferred
stock|preferred security that is
unregistered for a certain period of
time.[http://query.nytimes.com/gst/fullp
age.html?res=9E0CE1DB1031F936A357
55C0A9629C8B63 When Private Mixes
With Public; A Financing Technique
Grows More Popular and Also Raises
Concerns]
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 Société Générale - 1990s 2000s

1 Bolstered by a sound client base and a

recognised capacity for innovation borne
out by the league tables (the Group is
ranked among the global leaders in
equity derivatives, convertible bonds,
export finance, etc.), Société Générale is
looking to develop its MA, advisory and
IPO activities through the acquisition of
specialised firms (SG Hambros in the
United Kingdom, Barr Devlin in the
United States).
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 ISO 10962 - Structure of CFI Code

1 * The second character refers to

specific groups within each category.
For example, the subdivisions of the
Equities category are: ordinary
shares, preferred/preference shares,
units, and others, while for the Debt
instruments category, the
subdivisions are: bonds, convertible
bonds, money market instruments,
and others.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 BNP Paribas CIB - Structure of BNP Paribas CIB

1 * 'Corporate Finance:' BNP Paribas'

Corporate Finance team performs most of
the traditional investment banking
functions of the group including mergers
and acquisitions advisory, and equity
raising operations such as Initial Public
Offering|Initial Public Offerings (IPOs),
rights issues, and convertible
bonds|convertible bond issues.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Mathematical finance - Derivatives pricing: the Q world

1 The goal of derivatives pricing is to

determine the fair price of a given
security in terms of more market
liquidity|liquid securities whose price is
determined by the law of supply and
demand. The meaning of fair depends,
of course, on whether one considers
buying or selling the security.
Examples of securities being priced are
option (finance)|plain vanilla and exotic
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Credit rating agency - Ratings use in bond market

1 The process and criteria for rating a

convertible bond is similar, although
different enough that bonds and
convertible bonds issued by the same
entity may still receive different ratings

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 HealthSouth - Recovery and the new HealthSouth

1 Another issue that was immediately

addressed by the board was the means
by which it obtain the cash for interest
payments of senior bonds and
principal payments due on a $344
million convertible bond

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Income statement - Earnings per share

1 * 'Diluted': in this case “weighted

average of shares outstanding” is
calculated as if all stock options,
warrants, convertible bonds, and other
securities that could be transformed
into shares are transformed. This
increases the number of shares and so
EPS decreases. 'Diluted EPS is
considered to be a more reliable way to
measure EPS.'
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Sino-Forest Corporation - Subsidiaries

1 Sino-Forest Corporation owns an interest

of approximately 60% of Omnicorp Limited
(to be renamed Greenheart Group Limited
upon shareholder approval), a Hong Kong
listed company (HK:0094). In addition,
Sino-Forest owns HK$212 million of
convertible bonds of Omnicorp, which if
fully converted would increase Sino-
Forest’s interest to nearly 60% of the
enlarged issued share capital of
Omnicorp.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Exotic option - Features

1 Even products traded actively in the

market can have the characteristics of
exotic options, such as convertible bonds,
whose valuation can depend on the price
and Volatility (finance)|volatility of the
underlying Stock|equity, the credit rating,
the level and Volatility (finance)|volatility of
interest rates, and the correlations
between these factors.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Bond (finance) - Types

1 * Convertible bonds lets a bondholder

exchange a bond to a number of shares of
the issuer's common stock.

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 Capital structure - Arbitrage

1 If the spread (the difference between

the convertible and the non-
convertible bonds) grows excessively,
then the capital-structure arbitrageur
will bet that it will converge.

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 Commercial banking - Unsecured loan

1 Some corporate bonds have an embedded

call option that allows the issuer to redeem
the debt before its maturity date. Other
bonds, known as convertible bonds, allow
investors to convert the bond into equity.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Securities research

1 Fixed income analysts are also often

subdivided by asset class—among the
fixed income asset classes with the
most analyst coverage are convertible
bonds, high yield bonds (see high-
yield debt), and distressed bonds (see
distressed securities)

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 Structured products - Origin

1 Investment banks then decided to add

features to the basic convertible bond,
such as increased income in exchange for
limits on the convertibility of the stock, or
principal protection

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Yield (finance)

1 In finance, the term 'yield' describes the

amount in cash (in percent terms) that returns
to the owners of a security (finance)|security.
Normally, it does not include the price
variations, at the difference of the total Return
(finance)|return. Yield applies to various
stated rates of return on stocks (common and
preferred, and Convertible bond|convertible),
fixed income instruments (bonds, notes, bills,
strips, zero coupon), and some other
investment type insurance products (e.g.
annuities).
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Mezzanine capital - Structure

1 *'Ownership' — Along with the typical

interest payment associated with
debt, mezzanine capital will often
include an Stock|equity stake in the
form of attached warrant
(finance)|warrants or a conversion
feature similar to that of a convertible
bond. The ownership component in
mezzanine securities is almost always
accompanied by either cash interest
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 Stock dilution

1 This increase in the number of shares

outstanding can result from a primary
market offering (including an initial public
offering), employees exercising employee
stock options|stock options, or by
conversion of convertible bonds, preferred
shares or warrant (finance)|warrants into
stock

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 Convertible bond

1 Convertible bonds are most often

issued by companies with a low credit
rating and high growth potential.

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 Convertible bond

1 These properties lead naturally to the idea

of convertible arbitrage, where a long
position in the convertible bond is
balanced by a short position in the
underlying equity.

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 Convertible bond

1 From the issuer's perspective, the key

benefit of raising money by selling
convertible bonds is a reduced cash
interest payment. The advantage for
companies of issuing convertible bonds
is that, if the bonds are converted to
stocks, companies' debt vanishes.
However, in exchange for the benefit of
reduced interest payments, the value of
shareholder's equity is reduced due to the
stock dilution expected when
bondholders convert their Bond
(finance)|bonds into new shares.
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 Convertible bond - Types

1 *'Vanilla convertible bonds' are

the most plain convertible
structures

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 Convertible bond - Additional features

1 Any convertible bond structure, on top of

its type, would bear a certain range of
additional features as defined in its
issuance prospectus:

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 Convertible bond - Additional features

1 *Conversion ratio: The number of shares

each convertible bond converts into. It
may be expressed per bond or on a per
centum (per 100) basis.

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 Convertible bond - Additional features

1 *Coupon: Periodic interest payment paid

to the convertible bond holder from the
issuer. Could be fixed or variable or equal
to zero.

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 Convertible bond - Additional features

1 *Yield: Yield of the convertible bond at

the issuance date, could be different
from the coupon value if the bond is
offering a premium redemption. In
those cases the yield value would
determine the premium redeption value
and intermediary put redemption value.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Additional features

1 *Contingent conversion (aka CoCo):

Restrict the ability of the convertible
bondholders to convert into equities

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 Convertible bond - Additional features

1 *Change of control event (aka Ratchet):

Conversion price would be readjusted in case
of a take-over on the underlying company.
There are many subtype of ratchet formula
(e.g. Make-whole base, time dependent...),
their impact for the bondholder could be small
(e.g. ClubMed, 2013) to significant (e.g.
Aegis, 2012). Often, this clause would grant
as well the ability for the convertible
bondholders to put i.e. ask for the early
repayment of their bonds.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Structure and terminology

1 Due to their relative complexity, the

convertible investors could refers to the
following terms while describing a
convertible bonds:

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 Convertible bond - Structure and terminology

1 typical in the case of the Sukuk, Islamic

convertible bonds, needing a specific legal
setup to be compliant with the Islamic
law).

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Structure and terminology

1 *Synthetic: synthetically structured

convertible bond issued by an investment
bank to replicate a convertible payoff on a
specific underlying. Most reverse convertibles
are synthetics. Please note the Packaged
Convertibles (e.g. Siemens 17
DE000A1G0WA1) are not considered to be
synthetics since the issuer would not be an
Investment Bank: they would only act as
underwriter. Similarly, replicated structure
using straight bonds and options would be
considered as a package structure.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Markets and Investor profiles

1 The global convertible bond market is a

relatively small with about 400 bn USD (as
of Jan 2013, excluding synthetics), as a
comparison the straight corporate bond
market would be about 14,000 bn USD.
Among those 400 bn, about 320 bn USD
are Vanilla convertible bonds, the largest
sub-segment of the asset class.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Markets and Investor profiles

1 *Hedged/Arbitrage/Swap investors:
Proprietary trading desk or hedged-funds
using as core strategy Convertible
Arbitrage which consists in, for its most
basic iteration, as being long the
convertible bonds while being short the
underlying stock

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Valuation

1 The 3 main stages of convertible

bond behaviour are:

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 Convertible bond - Valuation

1 From a valuation perspective, a

convertible bond consists of two
assets: a Bond (finance)|bond and a
warrant (finance)|warrant. Valuing a
convertible requires an assumption of

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Uses for investors

1 *Convertible bonds are usually issued

offering a higher yield than obtainable on
the shares into which the bonds convert.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Uses for investors

1 *Convertible bonds are safer than

preferred stock|preferred or common
shares for the investor. They provide
asset protection, because the value of
the convertible bond will only fall to
the value of the bond floor. At the
same time, convertible bonds can
provide the possibility of high equity-
like returns.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible bond - Uses for investors

1 *Also, convertible bonds are usually less

volatile than regular shares. Indeed, a
convertible bond behaves like a call
option. Therefore, if C is the call price and
S the regular share then

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Weighted average cost of capital

1 Companies raise money from a number of

sources: common equity, preferred stock,
straight debt, Convertible bond|convertible
debt, Exchangeable bond|exchangeable
debt, Warrant (finance)|warrants, Option
(finance)|options, Pension|pension
liabilities, executive stock options,
governmental subsidies, and so on

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Mortgage law - Renaissance and after

1 Attempts by the lender to carry an equity

interest in the property in a manner similar
to convertible bonds through contract have
been therefore struck down by courts as
clogs, but developments in the 1980s and
1990s have led to less rigid enforcement
of this principle, particularly due to interest
among theorists in returning to a freedom
of contract regime.Shanker M
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Exchangeable bond

1 A convertible bond gives the holder the option to

convert bond into shares of the issuer.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Exchangeable bond

1The pricing of an exchangeable bond is

similar to that of convertible
bond,[http://faculty.gsm.ucdavis.edu/~bmb
arber/Paper%20Folder/FM%20Exchangea
ble%20Debt.pdf Exchangeable Debt]
splitting it in straight debt part and an
embedded option part and valuing the two
separately.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Debenture - Convertibility

1 As a result of the advantage a buyer gets

from the ability to convert, convertible
bonds typically have lower interest rates
than non-convertible corporate bonds.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Indenture - Modern usage

1 'Bond indenture' (also 'trust indenture' or

'deed of trust') is a legal document issued to
lenders and describes key terms such as the
interest rate, maturity date, convertible
bond|convertibility, pledge, promises,
representations, covenants, and other terms
of the bond offering. When the Prospectus
(finance)|offering memorandum is prepared in
advance of marketing a bond, the indenture
will typically be summarised in the description
of notes section.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Trader (finance)

1 According to the Wall Street Journal in

2004, a managing director convertible
bond trader was earning between
$700,000 and $900,000 on
average.[http://online.wsj.com/article/SB11
3141870174290857.html Street's
Weather: Bonus Showers - WSJ.com]

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 BNP Paribas - Corporate and investment banking

1 * 'Investment Banking:' BNP Paribas'

Corporate Finance team performs most
of the traditional investment banking
functions of the group including
mergers and acquisitions advisory, and
equity raising operations such as Initial
Public Offering|Initial Public Offerings
(IPOs), rights issues, and convertible
bond issues.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Fortis (finance) - Post-Leterme I developments

1 Het Financieele Dagblad reports that

Hessels, acting chairman of the board of
Fortis, expects additional payments from
the Dutch government: it concerns €2
billion worth of convertible bonds, which
are due to be converted in 2010 into
Fortis's shares at a fixed price of €18.74
per share

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Euronext Paris - Structure and indices

1 The SBF-FCI index is based on a

selection of convertible bonds that
represent at least 70% of the total
capitalization of this market,
calculated twice daily

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Relative value (economics) - In hedge funds

1 Some hedge funds engage principally in

arbitrage strategies in the global equity
and corporate debt markets by taking
advantage of mispricings between two
related and often correlated securities.
Typical arbitrage strategies include: fixed
income arbitrage, convertible
arbitrage|convertible bond arbitrage,
statistical arbitrage, and derivative
arbitrage.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible arbitrage

1 The premise of the strategy is that the

convertible is sometimes priced
inefficiently relative to the underlying
stock, for reasons that range from
illiquidity to market psychology. In
particular, the equity option
embedded option|embedded in the
convertible bond may be a source of
cheap volatility (finance)|volatility,
which convertible arbitrageurs can
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Convertible arbitrage - Risks

1 In the Black Monday (1987)|1987 stock

market crash, however, many convertible
bonds declined more than the stocks into
which they were convertible, apparently for
liquidity reasons, with the market for the
stocks being much more liquid than the
relatively small market for the bonds

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 Convertible security

1 Convertible securities may be convertible

bonds or preferred stocks that pay regular
interest and can be converted into shares
of common stock (sometimes conditioned
on the stock price appreciating to a
predetermined level)

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 Bond option - Embedded options

1 *Convertible bond: allows the holder

to demand conversion of bonds into
the stock of the issuer at a
predetermined price at a certain time
period in future.

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 Hybrid security - Examples

1 * A convertible bond is a Bond

(finance)|bond (i.e. a loan to the
issuer) that can be converted into
common share (finance)|shares of the
issuer. A convertible bond can be
valued as a combination of a straight
bond and an Option (finance)|option
to purchase the company's stock.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 NYSE Euronext - Euronext

1 Euronext is the first integrated cross-

border exchange, combining the stock
exchanges of Amsterdam, Paris,
Brussels and Lisbon into a single
market. Issuers who meet European
Union regulatory standards are qualified
for listing on the regulated markets
operated by Euronext. The company's
exchanges list a wide variety of
securities, including domestic and
international equity securities,
convertible bonds, warrants, trackers
and debt securities, including corporate
and government bonds.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Jacob Little - Market operations

1 What the traders did not know was

that Little had purchased convertible
bonds at a company sale in London a
few years before; Little entered the
premises, apparently unrushed,
carrying an oversize bag of what was
revealed to be those very bonds,
which Little had converted to stocks

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Jacob Little - Later life and legacy

1This did much to give

credence to convertible
bonds, then still a novelty.

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 Model risk - Illiquidity and model risk

1 Convertible bonds, mortgage backed

securities, and high-yield bonds can
often be illiquid and difficult to value.
Hedge funds that trade these
securities can be exposed to model
risk when calculating monthly NAV
for its investors.

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 List of systemically important banks

1 * Max. 1.5% Additional Tier 1 capital

(Hybrid security|Hybrid capital, i.e.
Convertible bond|Contingent Convertibles
aka CoCos).

https://store.theartofservice.com/the-convertible-bond-toolkit.html
List of systemically important banks - SIFI's within each of the EEA member states (both
domestic and global)

1In addition, the new EU rules also

requires all instruments recognised in
the Additional Tier 1 capital of any
credit institution or investment firm to
be Convertible bond|Contingent
Convertibles, where it has to be either
written down or converted into
Common Equity Tier 1 instruments,
when the Common Equity Tier 1
capital ratio of the institution falls
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 Outstanding bond - Types

1 * Convertible bonds let a bondholder

exchange a bond to a number of shares of
the issuer's common stock. These are
known as Hybrid security|hybrid securities,
because they combine Equity
(finance)|equity and debt features.

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 Callable bond

1 The price behaviour of a callable bond is

the opposite of that of puttable bond.
Since call option and put option are not
mutually exclusive, a bond may have both
options
embedded.[http://nd.edu/~zda/TeachingNo
te_ConvertibleBonds.pdf Teaching Note
on Convertible Bonds]

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Reverse convertible - How do reverse convertibles work?

1 Note: Coupon rate is determined by issuer.

Sometimes holders do expect zero coupon
bond like reverse convertible bonds.

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 Convertible note - Additional features

1 *Contingent conversion (aka CoCo):

Restrict the ability of the convertible
bondholders to convert into equities

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 Borsa Italiana - Operations

1 Borsa Italiana has managing responsibility

for Italy's derivative (finance)|derivatives
markets (IDEM and MIF) and its fixed
income market (MOT). On the MOT
(Electronic Government Bond and
Securities Market), buy and sell contracts
are traded on government securities and
nonconvertible Bond (finance)|bonds; the
EuroMOT is the Euro-Bond Electronic
Market that trades Eurobonds, bonds from
foreign issuers and asset-backed
https://store.theartofservice.com/the-convertible-bond-toolkit.html
securities.
 Borsa Italiana - Structure

1 The stock market is divided into five parts:

1) The electronic share market (MTA)
trades Italian share (finance)|shares,
convertible bonds, and warrant
(finance)|warrants; the Covered
warrant|covered-warrant market is an
electronic share market

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 Diluted Earnings Per Share

1 'Diluted Earnings Per Share (diluted EPS)'

is a company's earnings per share (EPS)
calculated using fully diluted shares
outstanding (i.e. including the impact of
stock option grants and convertible
bonds). Diluted EPS indicates a worst
case scenario, one that reflects the
issuance of stock for all outstanding
options, warrants and convertible
securities that would reduce earnings per
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 Diluted Earnings Per Share - U.S. GAAP

1The numerator used in calculating

diluted EPS is adjusted to take into
account the impact that the conversion of
any securities would have on earnings.
For example, interest would be added
back to earnings to reflect the
conversion of any outstanding
convertible bonds, preferred dividends
would be added back to reflect the
conversion of convertible preferred
stock, and any impact of these changes
on other financial items, such as
royalties and taxes, would also be
adjusted.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Banco Popolare

1 In June 2009 the company became the

first Italian bank to receive state aid
from the Politics of Italy|Government
of Italy due to the ongoing Financial
crisis of 2007–2010|financial crisis. It
sold €1.5 billion in convertible bonds
to the state.

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 Pecking Order Theory - Profitability and debt ratios

1 That is, they start with debt, then

possibly hybrid securities such as
convertible bonds, then perhaps
equity as a last resort

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Aegon - History

1 On October 28, 2008, the Dutch government and

De Nederlandsche Bank agreed to give Aegon a
€3 billion capital injection to create a capital buffer
in exchange for convertible bonds to ease the
group through the Financial crisis of 2007-
2008|financial crisis.[http://www.dnb.nl/en/news-
and-publications/news-and-archive/persberichten-
2008/dnb190201.jsp Government reinforces
AEGON’s capital position by EUR 3 billion] De
Nederlandische Bank, 28 October 2008 On June
15, 2011, Aegon fulfilled its key objective of
repurchasing all of the €3 billion core capital
securities issued to the Dutch State

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Embedded option

1 An 'embedded option' is a component of

a bond (finance)|financial bond or other
security, and usually provides the
bondholder or the issuer the right to take
some action against the other party. There
are several types of options that can be
embedded into a bond. Some common
types of bonds with embedded options
include callable bond, puttable bond,
convertible bond, extendible bond, and
exchangeable bond. A bond may have
several options embedded if they are not
mutually exclusive.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Lobster trap (finance)

1 In a lobster trap, the target firm issues a

Articles of Incorporation|charter that
prevents individuals with more than 10%
ownership of convertible
security|convertible securities (includes
convertible bonds, convertible preferred
stock, and warrants) from transferring
these securities to Voting interest|voting
stock
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Bond fund - Types

1 Bond funds may also be classified by

factors such as type of yield (high
income) or term (short, medium, long)
or some other specialty such as zero-
coupon bonds, international bonds,
multisector bonds or convertible
bonds.

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 Puttable bond

1 The price behaviour of puttable bonds

is the opposite of that of a callable
bond. Since call option and put option
are not mutually exclusive, a bond may
have both options
embedded.[http://nd.edu/~zda/Teaching
Note_ConvertibleBonds.pdf Teaching
Note on Convertible Bonds]

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Business organizations - Peru

1Those conditions state there must be a

primary public offering of shares or
convertible bonds in stocks, which are
held by more than 750 shareholders, more
than 35% of its capital belonging to 175
shareholders, or that all shareholders
entitled to vote approve the adjustment to
the scheme

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 Equity derivative - Convertible bonds

1 Convertible bonds are bonds that can

be converted into shares of stock in
the issuing types of
companies|company, usually at some
pre-announced ratio. It is a hybrid
security with debt- and equity-like
features. It can be used by investors to
obtain the upside of equity-like
returns while protecting the downside
with regular bond-like coupons.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 International Petroleum Investment Company - Company history

1 :2011 IPIC fulfilled its commitment

to subscribe for the remaining
mandatory convertible bonds in Aabar
and converted those bonds into equity,
increasing its stake from 86.2 per
cent. to 93.1 per cent. In addition, IPIC
purchased shares of Aabar in the open
market, which further increased its
stake from 93.1 per cent. to 95.3 per
cent. (now 95.47 per cent.).
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Furuno - 2000s

1 * '2006' Developed the 12.1-inch multi-

color LCD radar FR-8002 series.
Developed FCV-620, a fish finder with a
5.6-inch LCD for the pleasure boat
market. Purchased a 49% stake in
French company SIGNET S.A. and
convertible bonds. Established Furuno
Europe as a local subsidiary in
Rotterdam, the Netherlands. Developed
S-VDR (Simplified Voyage Data Recorder)
VR-3000S. Developed ultra sensitive GPS
receiver for mobile communication
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 Citadel LLC - Kensington and Wellington Funds

1 On December 4, 2008, the Wall Street

Journal revealed that the largest Citadel
funds lost 13 percent in November,
bringing the losses for the year to 47
percent. By comparison the Hedge Fund
Research HFRX US Global Hedge Fund
Index is down 22 percent this year.
Losses came from positions in
convertible bonds, bank loans and
investment grade bonds. Citadel
rebounded from its 2008 losses to post a
$5 billion profit through November
2009.http://www.opalesque.com/55926/
citadel/rebounds163.html
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 Equity Capital Markets

1 Institutions providing ECM services

may be involved in initial public
offerings (IPO),convertible bonds, and
other services involving
equity.http://www.hsbcnet.com/gbm/
products-services/financing/equity-
capital-markets.html They may also
raise money for a company merge or
acquisition of another company
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 Qualified institutional placement - QIPs in India and the US

1 Therefore, to encourage domestic securities

placements (instead of Currency|foreign
currency convertible bonds (FCCBs) and
global or American depository receipts
(GDRs or ADRs)), the Securities
exchange|Securities Exchange Board of India
(SEBI) has with effect from May 8, 2006
inserted Chapter XIIIA into the SEBI
(Disclosure Investor Protection) Guidelines,
2000 (the DIP Guidelines), to provide
guidelines for Qualified Institutional
Placements (the QIP Scheme).
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Michael Milken - High-yield bonds and leveraged buyouts

1 Before long, the CEOs and CFOs of many

smaller and mid-sized companies
previously limited to the slow and
expensive private-placement market were
making early-morning pilgrimages to
Beverly Hills seeking to issue high-yield
and/or convertible bonds through Drexel
Burnham

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 Trading (finance)

1 According to the Wall Street Journal in

2004, a managing director convertible
bond trader was earning between
$700,000 and $900,000 on
average.[http://online.wsj.com/article/S
B113141870174290857.html Street's
Weather: Bonus Showers - WSJ.com]

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 Credit rating agencies - Ratings use in bond market

1 The process and criteria for rating a

convertible bond are similar, although
different enough that bonds and
convertible bonds issued by the same
entity may still receive different ratings

https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Asia Television - Ownership shift

1 Tsai has agreed to inject HK$1 billion in the form of

convertible bonds.The Standard HK

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 Bolsa de Madrid

1 'Bolsa de Madrid' (; Madrid Stock

Exchange) is the largest and most
international of Spain's four regional stock
exchanges (the others are located in
Barcelona, Valencia (city in
Spain)|Valencia, and Bilbao) that trade
shares and convertible bonds and fixed
income securities, and both government
and private-sector debt. Bolsa de Madrid
is owned by Bolsas y Mercados
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Aabar Investments - UniCredit

1 In June 2010, Aabar bought a 4.99%

stake in UniCredit|UniCredit SpA
worth $2.48 billion, becoming the
Italian bank’s second biggest
shareholder. The investment is in line
with the company's strategy to invest
in financial services. It first invested
in UniCredit, the biggest lender in
Central and Eastern Europe, in the
bank's 2008 capital increase through
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 Hybrid Investment

1 The two most popular types of Hybrid

Investments are Preferred Stock and
Convertible Bond (finance)|Bonds.

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 Hybrid Investment

1 'Convertible Bonds' – Bondholders

periodically receive interest payments.
An exchange of bonds for a specified
number of equity shares is acceptable,
but only in accordance with the
convertible bond covenant.

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 Finnish banking crisis of 1990s - Government intervention and aftermath

1 In 1992, to stabilize the financial

sector and to prevent a credit crunch,
the government gave a 7.1 billion
Finnish markka|FIM (€1.2 billion),
initially zero-interest convertible
bond|convertible loan to Finnish
banks. Most of the banks (with the
notable exception of SKOP) later paid
back this loan.
https://store.theartofservice.com/the-convertible-bond-toolkit.html
 Lazard Capital Markets

1 Lazard Capital Markets focuses its

activities on equity research, sales and
trading; fixed-income and convertible
bond sales and trading; and securities
underwriting. The firm maintains a
business alliance agreement with
Lazard that provides for the
continuation of certain historical
business relationships including
origination of transactions.
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For More Information, Visit:

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m/the-convertible-bond-
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