Essential Aspects You Should Know About Foreign Currency Convertible Bonds

Essential Aspects You Should Know About Foreign Currency Convertible Bonds

Companies issue Foreign Currency Convertible Bonds (FCCBs) in a foreign currency. The bonds are issued for a certain number of years. During the period, investors receive coupon payments (interest). At the end of the period, the bonds can be converted to shares. Warrants attached to the bonds may trigger conversion to stock, when the stock reaches a pre-determined price.

Some Features

Foreign currency convertible bonds are listed on the stock exchanges. Features vary from bond to bond. Generally, the interest rate may be two to seven percent or even zero. Three risk factors need attention. The interest is paid in foreign currency; because of this, the exchange fluctuation can affect profits. If the price of the stock falls, conversion looses its attraction. Tax laws on capital gains from the stock obtained through conversion may change.

Put and Call

Foreign currency convertible bonds can be redeemed before the stipulated date by either the company or investors. If the issuing company closes the loan before the determined date, it is CALL option. Investors may exercise a PUT option, that is, they may convert the bond to shares before the determined date. These options depend upon the type of bond and RBI guidelines.

Advantage Investor

The redemption "rate" can vary based on the maturity date and the stock's price. For example, if the stock price has risen and maturity date is near, foreign currency convertible bonds of a company may be redeemed at many times higher than the coupon rate. It may sell at a discount if reverse is the scenario. The debt portion that is the coupon or interest and the stock conversion option can be traded separately. An investor may sell off the debt to another who is interested only in the interest payments and enjoy the stocks when converted. Private placement in foreign currency convertible bonds is allowed subject to certain guidelines. Large investors can check with their brokers or investment advisors, in view of returns and tax advantages.

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