As convertible bond is hybrid security; they offer reduced downside risk compared to common stocks. If the stock price falls, the price of bond remains the same because it is also fixed income security.
Disadvantages of convertible bonds
• Lower Yield: convertible bond offers lower yield than the straight bond of similar quality because they have the option to convert.
• Conversion Premium: The conversion premium on convertible bonds is an addition premium that investor pay for the option to convert their bond into common shares of the issuers. This premium lower the yield on the bond.
• Dilution: when the convertible bond is converted into the common share, it increases the number of outstanding shares, which you be dilute by the existing shares.
Conversion Ratio of Convertible Bond
A convertible bond is a type of bond that include the option for the bondholder to convert the bond into the share of issuing company’s common stock. The conversion ratio of convertible bond determines the amount and number of shares of stock that bondholder will receive upon conversion. The conversion ratio is typically expressed as a fixed number of shares per bond or the ratio between shares and bonds.