Convertible Debt
Many of the small “dot-com” companies got financing in the form of an instrument called convertible debt. This is like ordinary debt, in that it pays a regular (but slightly lower than you would expect) interest amount. But debtholders have the right to convert it to equity at some point in the future. Why do you think these companies chose this instrument? Do you think it was a good idea? Does convertible debt offer the same advantages to larger, more established companies such as Exxon Mobil? Remember: there’s no ‘free lunch’. If a company offers creditors an option to convert the bond into stocks it must be giving them something of value. It should get something in return… (You may browse for ‘convertible debentures’ on the web to help you out with this)…
Do research on the Internet and show the reference for the information. Don’t forget to respond to a colleague’s posting also.
Professor’s Note: In addition to searching the Internet for text related to this threaded discussion, please watch the following videos (click on the following link to access these videos) and post your comments.
http://www.youtube.com/watch?v=0_S0bS7jQMM Understanding Convertible Bonds
http://www.youtube.com/watch?v=_Ni15ewtbRY Convertible Debt
Grading Criteria: Try to add information not previously discussed by others. Please, provide factual information (not merely opinions) backed up by details or examples. Your comments should be in your own words and include references.
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