Convertible bonds – a hybrid instrument of capital investment

Abstract

Hybrid bonds are financial instruments that occupy the space between equity capital and debt capital. Out of these bonds the most representative instrument are convertible bonds. They have characteristics resembling both shares and straight bonds. The complex structure of convertible bonds causes their market
price to be determined in terms of three components: straight bond value, share value, and conversion option value. An important decision of the investor in the case of these bonds is their conversion into shares. It is particularly difficult with callable convertible bonds because the interests of both parties to the transaction, i.e. the investor and the issuer, come then into consideration. Convertible bonds are an important instrument of investment and a component of investment portfolios.