What Are Convertible Bonds?
Convertible bonds are debt securities that can be converted into a predetermined number of equity shares at specific times during the bond's life. They combine features of both debt and equity investments.
In Ghana's growing capital markets, convertible bonds offer investors the safety of regular interest payments like traditional bonds, with the potential upside of equity participation if the company performs well.
Best of Both Worlds
Earn steady interest like a bondholder, but convert to shares if the company's value increases significantly. This provides downside protection with upside potential.
How You Earn Returns
Interest Payments
Receive regular interest payments (coupon) throughout the bond's term, typically at lower rates than traditional bonds due to conversion option.
Conversion Gains
If you convert to shares and the company value increases, you benefit from capital appreciation just like equity shareholders.
Example Scenario
You invest GHS 5,000 in convertible bonds with 5% annual interest, convertible to 500 shares at GHS 10 per share.
- • If share price stays at GHS 8: Keep bond, earn GHS 250 annual interest
- • If share price rises to GHS 15: Convert to shares worth GHS 7,500 (50% gain)
How Conversion Works
Conversion Ratio
Number of shares you'll receive per bond. Fixed at issuance (e.g., 1 bond = 50 shares).
Conversion Price
The effective price per share when converting (Bond Value ÷ Conversion Ratio).
Conversion Period
Specific timeframes when conversion is allowed, often with windows or continuous periods.
Conversion Premium
Amount above current share price that you pay for conversion rights.
When Should You Convert?
Convert When:
- • Share price exceeds conversion price significantly
- • Company shows strong growth prospects
- • Near bond maturity with shares trading above conversion price
- • Company announces dividend increases
Keep Bond When:
- • Share price remains below conversion price
- • You prefer steady interest income
- • Market conditions are uncertain
- • Interest rates are rising (bonds become more attractive)
Risks to Consider
Interest Rate Risk
Bond value decreases when interest rates rise, affecting both the bond and conversion value.
Conversion Risk
Share price may never reach conversion price, making the conversion option worthless.
Lower Interest Rates
Convertible bonds typically offer lower interest rates than regular bonds due to the equity option.
Credit Risk
Company may default on interest payments or principal repayment if financial condition deteriorates.
Quick Facts
Legal Framework
Convertible bonds in Ghana are governed by:
- • Securities Industry Act, 2016
- • Companies Act, 2019 (Act 992)
- • SEC Bond Market Guidelines
- • Trust Deed and Bond Terms