Life – a user's manual Part II - Boksidan

An equity bond is a product consisting of a bond without interest, published by the issuing agent (usually
one of our banks), and call options. The call options are in turn contracts the bank to buy a particular
company's stock at a specified price at a date in the future. Equity-linked bonds may have names, such as
tiger 2015, energy 2016 th . And that means that the issuer intends to buy options in companies in tiger
economy countries or energy companies. I've had a few different index-linked bonds. As a rule, they have
unfortunately been a pretty bad investments with little or no added value. This also applies to bonds
purchased in times of global recession that expired during a recent economic boom.
One reason for the low value growth is that the banks are taking a rather high fee for each bond. As in the
example below where the bank (Handelsbanken) takes 1 000 SEK in fee for a bond that is on 10 000 SEK.
Another reason is that the bonds have a fixed end date and who knows how the current stock market looks
like at that specific time
Another variant are the convertible bonds. They are issued by companies as corporate bonds and gives some
interest to the date the loan is to be paid back by the company. In addition, they give the holder the right to
purchase a number of shares in the company after a predetermined date for a certain predetermined price (the
conversion price), which often corresponds to the value of the bond including the accrued interest. The
benefits to the issuing company compares to the usual way to take loans or issuing corporate bonds is that
they can get a lower interest rate because buyers are compensated by the chance that the share price reaches
above the predetermined price.
The advantage compared to directly issue new shares, are that the latter, to be attractive for buyers, has to be
sold with at a discount compared with the shares that are already on the market. Because the conversion
price for the convertible bonds are usually higher than the current market price.
The advantage for the buyers of the convertible bonds is that the risk is lower compared to a purchases of the
shares, because they at least get back the money they lent, even if the price of the company's stock falls
below the conversion price. Given that the company does not go bankrupt. The disadvantages are that there
is less trading in convertible bonds compared with stocks so they can be more difficult, if necessary, to get
rid of them. Moreover, it is difficult to make a clip compared to buying shares. In addition, the shares
probably give dividends, which may even exceed the interest on the convertible bonds.
226