Convertible bonds

Convertible bonds

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Convertible bonds[edit]

A convertible bond is a security that changes its type from BOND to EQUITY during its lifetime. Convertible bonds are also known as convertible notes or convertible debentures, depending on their term.

Although the terms and conditions of a convertible bonds may be complex, this asset type is particularly simple to handle in FIA.

Example[edit]

A bond is issued in USD with a 2% coupon, maturity date 20th March 2015, two coupons per year, and is priced off the USD_CURVE yield curve. The bond is converted to common equity in the issuing company on 15th May 2011.

This security is represented by two entries in the security definition file:

Untitled

Security ID
Name
Start date
Security type
Currency
Yield curve
Maturity
Credit rating
Coupon
Coupon frequency
US00000CONV
MEGACORP CONVERT 2.00% 20-MAR-2015
BOND
USD
USD_CURVE
March 20, 2015
AAA
0.02
2
US00000CONV
MEGACORP CONVERT 2.00% 20-MAR-2015
May 15, 2011
EQUITY
USD
USD_CURVE
March 20, 2015
AAA
0.02
2

Both rows are identical except for the entries in the Start date and Security type columns. By changing the security type at the given date, the system will treat the convertible as a bond before the conversion date and as an equity afterwards.