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What are convertible bonds, floating rate bonds and negative bonds?

What are convertible bonds, floating rate bonds and negative bonds?


Convertible Bonds: Convertible bonds are exceptional securities that have features of both bonds and equity options. The holders of convertible bonds have the opportunity to convert bonds held by them into specified number of company’s equity shares during validity period for options mentioned in the bonds. The bond holder also receives the coupon payment till the conversion of bonds into equity shares. However, if the bond holder does not convert the bonds into equity shares, the company redeems the bond at par on maturity of bonds besides periodic payment of coupons just like in the cases of normal bonds.

Floating rate Bonds: A floating rate bond, does not have a pre-determined coupon rate. The Bond Issuer Company resets the coupon rate regularly on the basis of fluctuation in the prevailing market rates of interest or some other external measures. In India, floating bonds usually come with a spread with reference to rate like Mumbai interbank offer rate (MIBOR) + say 45 basis points. It means that the coupon amount will change according to the prevailing MIBOR at the time of coupon payment. The investors of floating bonds buy them in anticipation of hike in the reference rate so that they earn a higher coupon rate in future.

Negative Bonds:  The investors of negative bonds are those investors who are ready to accept slightly less than the purchase value of the bonds on maturity of bonds, in anticipation of prolonged period of deflation. Mostly, investors like insurance companies, Pension funds, and commercial banks buy negative bonds issued by various Governments across the world.  The buyers of such bonds hold these bonds their liquidity requirements as well as borrow from Central Banks against pledging these securities. The Central banks also purchase these bonds as part of their foreign exchange reserve. There are one more class of investors who think that they can make profit out of investment in negative bonds. For example, you have purchased Japanese negative Bonds. When the currency value of Japanese Yen is appreciated against Indian Rupee then gain in value appreciation of that currency would offset your negative yield and may turn it into profit when you convert bond proceeds into Rupees.

Related articles:

  1. What is a Zero-Coupon Bond?
  2. What are Bonds, coupons, and yield to maturity?

 

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