The Research On Conversion Rights Of The Convertible Bonds

As a newly developed derivative, convertible bonds are a complicated derivative instrument and investment instrument. Convertible bond is characterized by its high value of call option and low value of investment risks, which is not fully understood by Chinese investors yet. This paper employs economical methods in three parts to demonstrate the investment value of Chinese convertible bonds. The price of convertible bonds have asymmetrical elasticity, that is, when the stock price falls, so will the price of convertible bonds; however, the extent that it falls is far below that of the stock price; when stock price rises, the rising extent of convertible bonds price exceeds that of the stock price.In the first section, this article analyzes the basic theoretical problem of the convertible bonds. The conversion rights of the convertible bond are the most important difference from corporate bonds. The conversion rights ensure the investor's interests, it also can relate with the interests of the issuing corporation and the shareholders. As a result, the introduction of the convertible bonds is timely and will be very helpful to meet the increasing financial demands of our enterprises. Convertible bonds issues are issues of bonds by a corporation the terms of which allow the holder to exchange his bond for shares of the issuer. Convertible bonds, through which issuer can collect more funds at lower cost, are wide used in the international capital market, and they can adjust issuer's corporate financial structure reasonably, and strengthen the issuer's ability to resist financial risks. In the second section, I pay attention to the character of the conversion rights. The option for the holder to exchange his bond for shares of the issuing corporation give the holder an opportunity to participate in the issuer's future growth. Without conversion rights, there is no convertible bonds. To achieve this goal, I explain some legal problems on the conversion price and conversion periods. There are many kinds of opinions about it. However, this article prefers it to forming rights. It means that it has no contains with the issuing corporation. When the plead of converting is arriving at the place of the issuing corporation, it comes into effect. In this way the interests of the bondholders can be protected very well. Conversion price and the period of conversion rights are the key parts. Conversions price is the balance between the convertible bondholder and the shareholder. So the reasonable price is very important. Compared with the denomination convertible system, the market value system fits our country. There are two kind of legal system of conversion period: timely conversion and conversion at any time. Our country chooses the later one, because it has more advantages.In the last section, this article focuses on the legal system of protection of the bondholders. Before the convertible bondholder operates the conversion rights, the relation between the convertible bondholder and the issuing corporation is creditor and debtor; After conversion rights are operated, the relation changes, the convertible bondholder become the shareholder of the corporation. As other shareholders the convertible bondholders also have the same rights. The corporate issuer often employs some techniques to force or induce the bondholders to accept the adverse indenture amendments. And bondholder's rights and interests will be damaged when some events happen, such as capitalization, subdivision and mergers. Compared with the corporate issuer and its shareholders, bondholders are weaker, so the bondholders need special protection in order to guarantee their interests.