Busted Convertible Security
Contents
Exploring Busted Convertible Securities: An Investment Perspective
Understanding Busted Convertible Securities
Busted convertible securities represent a unique aspect of the financial market, where convertible bonds lose their potential conversion value due to significant declines in the underlying stock price. These securities essentially function as traditional bonds, with minimal chances of conversion before maturity.
Deciphering Convertible Bonds
Convertible bonds offer investors the option to exchange their bonds for a predetermined number of shares of the issuing company's common stock. This conversion feature adds versatility to the bond, potentially allowing investors to benefit from stock price appreciation.
Identifying Busted Convertible Securities
When the price of the underlying stock drops substantially, typically more than 50% below the conversion price, the convertible bond is considered "busted." In such cases, the bond behaves more like an out-of-the-money option, with little incentive for conversion due to the diminished value of the underlying stock.
Trading Strategies for Busted Convertibles
Despite their diminished conversion prospects, some investors find value in trading busted convertibles. These securities often trade at prices and yields comparable to traditional non-convertible bonds of similar risk profiles. Moreover, should the underlying stock rebound, the convertible's value could appreciate, presenting an opportunity for investors.