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Ch4 financial instruments topic convertibles

R

Rajat gupta

Ton up Member
Can somebody please explain page 28 Ch 4 para one titled ' Return' of topic convertibles which says " Because convertibles do not benefit from the dividend growth enjoyed by ordinary shareholders, convertibles generally provide higher income than ordinary shares. Conversely, because they do offer the prospect longer term of benefiting from the growth of the dividends, convertibles will provide a lower income than conventional loan stock or preference shares.

In my opinion there should be the case that convertibles have higher return than conventional loan stock and lower return than ordinary shares. Please somebody help
 
Say conversion is to take place in 5 years, so for this period the shareholders will receive dividend income and enjoy the growth but convertible holders won't.
So to compensate for this, they're rewarded highly as compared to shareholders.

But they will be getting benefited after conversion and the loan stock holders won't, so the convertible holders are less rewarded as compared to them.

Hope this helps
 
Aditya mohan mathur said:
Say conversion is to take place in 5 years, so for this period the shareholders will receive dividend income and enjoy the growth but convertible holders won't.
So to compensate for this, they're rewarded highly as compared to shareholders.

But they will be getting benefited after conversion and the loan stock holders won't, so the convertible holders are less rewarded as compared to them.

Hope this helps
Click to expand...
So it means that convertibles will be rewarded retrospectively for dividend growth during the rest period? (Please correct if wrong) what about conversion premium? Wont it add up to cost and how can conventional loan provide higher return then convertibles ( assuming conversion to equity is accepted )
 
If the conversion takes place, then they're to be treated as equity and not convertibles.
Before the conversion, they get less than loanstock holders because of their future prospects.
 
Aditya mohan mathur said:
If the conversion takes place, then they're to be treated as equity and not convertibles.
Before the conversion, they get less than loanstock holders because of their future prospects.
Click to expand...
Would it be wrong to say that convertibles can provide higher return than equity shareholders even with lower risk than the equity shareholders? I think returns on convertibles can never exceed with that of equity shareholders . Please clarify
 
Generally the return on equity is higher because of the higher risk factor attached to it.
 
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