Zero-Coupon Convertible Security

Convertible securities are financing alternatives to equity and debt. Through convertible securities, the issuer sells equity at a premium to its current level and defers the dilution of the equity. Relative to the cost of comparable straight debt, the issuer is able to finance at a lower cost through a convertible security or convertible bond. A zero-coupon convertible security is also called as zero-coupon convertible bonds.  In the common stock of the issuing company, the zero-coupon convertible security after the common stock goes some level of price, utilizing the put option inherent in the security. Also refers to zero-coupon bonds that are convertible into an interest bearing bond at a certain time before the maturity. Zero-coupon convertible securities and equity bond units are variations on the standard convertible security or bond.  All of these alternatives offer participation in the equity accompanied with a debt feature

Zero–coupon convertibles and equity bond units have unique characteristics that make them attractive financial instruments to both issuers and investors. Zero-coupon bonds pay no coupon interest and are issued at deep discounts par value. Zero-coupon bonds or securities are generally issued at a 70 to 80 percent discount par value (i.e., a price of 200 dollars to 300 dollars). The bonds generate no annual cash flow stream (i.e., bonds pay a zero percent coupon) but provide a yield maturity. Since the bonds are issued at deep discounts to face value and mature in 15 to 20 years at par, zero coupon bonds provide attractive yields to maturity. From the issuers’ standpoint, zero-coupon bonds are attractive alternatives to issuing equity or straight debt. The issuer receives financing without diluting equity interests and does not incur current interest payments. Zero-coupon bonds, however, generate only a small amount of financing while appearing as a liability on the balance sheet at the principal amount. 

Questionnaire:

• What is zero-coupon convertible security?
• What are the uses of zero-coupon convertible security?