What is zero interest fully convertible debentures?
Key Takeaways. A zero-coupon convertible is a convertible bond issued by a corporation that pays no regular interest to bondholders. Because of the zero-coupon feature, these convertibles are sold at a discount and will instead mature to face value if they are not converted prior to the maturity date.
What is the meaning of fully convertible debentures?
A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer when the debenture is issued. Upon conversion, the investors enjoy the same status as ordinary shareholders of the company.
What happens to convertible bonds when interest rates rise?
Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal.
How do convertible bonds affect share price?
Most issuers hope that if the price of their stocks rises, the bonds will be converted to common stock at a price that is higher than the current common stock price. By this logic, the convertible bond allows the issuer to sell common stock indirectly at a price higher than the current price.
What are zero interest debentures?
Also known as zero coupon bonds/debentures, ZIBs do not carry and explicit/coupon rate of interest. They are sold at a discount from their maturity value. The difference between the face value of the bond and the acquisition cost is the gain/ return to the investors.
Are convertible debentures a good investment?
A convertible debenture will usually return a lower interest rate since the debt holder has the option to convert the loan to stock, which is to the investors’ benefit. Investors are thus willing to accept a lower rate of interest in exchange for the embedded option to convert into common shares.
What is the period for payment of interest on debentures?
Interest on debentures is usually payable half-yearly. Interest on debentures is payable even the company suffers a loss or does not earn profit. Interest on debentures is a charge against profits and, therefore, its payment is not subject to the earning of profits.
Why do companies issue convertible bonds?
Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond’s conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.
Are convertible bonds a good investment?
Convertibles offer greater potential for appreciation than ordinary corporate bonds and the investor can convert to benefit from stock price gains. In a fixed income portfolio, convertibles can enhance returns through exposure to equity-driven price increases and reduce impact of rising interest rates.
What is debenture bond?
A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds.
What is a zero rate?
(ˌzɪərəʊˈreɪt) verb (transitive) business, British. to rate at a VAT level of zero. If a builder is given the entire contract, he can zero-rate the VAT, and therefore need not charge you VAT.