Hung Convertibles

  

Categories: Derivatives, Bonds

Joke construction kit, supplies: (1) the term “hung convertibles;” (2) a men’s locker room; (3) a reference to (a) a honeymoon/romantic weekend, (b) a large male ungulate, or (c) both.

Hung convertibles is a slang term for convertible securities that find themselves underwater. As such, first we'll have to define "convertible securities."

Convertible securities are financial instruments that can get turned into stock under certain conditions. Convertible bonds offer the most famous version. They act like bonds (having a maturity date, paying interest etc.), but the holder can turn them in for a certain number of shares when the situation is right.

These convertibles provide a price basis for their equivalent shares. You have a 10-year convertible bond paying 5% interest, convertible to 1,000 shares of common stock at $20 a share. A hung convertible occurs when the market price for the stock trades well below the convertible price. You have that bond convertible at $20 a share. Current price: $9...hung convertible. You wouldn't want to do the conversion, because the stock is well below the convertible price. You'd rather wait, hoping the stock will rise to above $20. Then you can sell your shares into the market and make a profit.

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