Conversion parity occurs if the conversion value is equal to the convertible bond’s price.
Conversion premium
Conversion premium = Conversion value – bond price at conversion
Conversion value
For a convertible bond, the market value of the shares that would be received upon conversion. Conversion value = Price per share x Conversion ratio
Conversion ratio
For a convertible bond, the number of shares received for each converted bond. Conversion ratio = Par value of bond / Conversion price
Conversion price
For a convertible bond, the price per share at which the bond may be converted to common stock.
Put provision [Putable bonds]
An embedded option of a putable bond that gives the bondholders the right to sell the bond back to the issuer, at a pre-determined price, on specified dates. Puttable bonds are beneficial for the bondholders by guaranteeing a pre-specified selling price at the put dates. If market interest rate increases, the bondholder can sell back the putable bond at face …
Make-whole call provision
A modified form of call provision which reduces the reinvestment risk to the bondholders. With a make-whole bond, the call price is not fixed. It is based on the present value of the future cash flows the bondholder will not receive. As such, the calculated call price is unlikely to be lower than the market value of the bond. …
Call protection period
Some callable bonds are issued with a call protection period which prohibits the issuer from calling a bond early in its life. It is an assurance to investors that they will receive the promised yield for at least this period.
Contingency provision
Clause in a bond indenture that allows for some action if a specified event or circumstance occurs.
Embedded option
Contingency provisions that provide the issuer or the bondholders the right, but not the obligation, to take a specific action. These options are an integral part of the bond indenture and cannot be traded separately. Bonds that do not have any embedded options are referred to as straight bonds, or option-free bonds. Examples: Call provision, Put provision, Convertibility provision
