2.8 Corporate Debt & Convertible Bonds
Corporations issue debt ranging from secured asset-backed bonds to convertible debentures that offer equity upside.
Key FINRA Exam Takeaways
- Secured Debt: Mortgage bonds (real estate), Equipment Trust Certificates (planes, trains), Collateral Trust (securities).
- Unsecured Debt: Debentures (backed only by general credit) and Subordinated Debentures (junior claim).
- Convertible Bonds: Can convert to common shares. Conversion Ratio = $1,000 Par ÷ Conversion Price.
- Parity Price of Stock = Market Price of Bond ÷ Conversion Ratio.
- Corporate bond interest is FULLY TAXABLE at federal, state, and local levels.
Knowledge Checkpoint • Section 2.8
An investor owns an XYZ corporate bond with a conversion price of $25. How many shares of XYZ common stock will the investor receive upon converting one bond?