Financial markets

Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A Corporate bond is a bond issued by a corporation, as the name suggests. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...

Stock market Stock Preferred stock Common stock Stock exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... This article does not cite any references or sources. ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign exchange market Retail forex The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... The Retail Forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the much larger Foreign exchange market. ...

Derivative market Credit derivative Hybrid security Options Futures Forwards Swaps A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... This article does not cite any references or sources. ... This article or section is in need of attention from an expert on the subject. ...

Other Markets Commodity market OTC market Real estate market Spot market Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Valuation and Theories Market Valuation Financial market efficiency Financial market efficiency is an important topic in the world of Finance. ...

Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation This article does not cite any references or sources. ... In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... “Banker” redirects here. ... Financial supervision is government supervision of financial institutions by regulators. ...

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A convertible bond, or convertible debenture, is a type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio. It is a hybrid security with debt- and equity-like features. Although it typically has a low coupon rate, the holder is compensated with the ability to convert the bond to common stock, usually at a substantial premium to the stock's market value. In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... This article does not cite any references or sources. ... It has been suggested that this article or section be merged into Types of corporations. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance, coupons are attached to bonds, either physically, as with old bonds (with a stapler), or electronically. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. However, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares. For other senses of this word, see interest (disambiguation). ... For other senses of this word, see interest (disambiguation). ... This article needs to be cleaned up to conform to a higher standard of quality. ... In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... See stock (disambiguation) for other meanings of the term stock A stock, also referred to as a share, is commonly a share of ownership in a corporation. ...

Types

• Exchangeable convertibles are bonds where the stock underlying the bond is different from that of the issuer.

• Mandatory convertibles are short duration securities—generally with high yields—that are mandatorily convertible upon maturity into a variable number of common shares based on the stock price at maturity.

• Contingent convertibles (co-co) only allow the investor to convert into stock if the price of the stock is a certain percentage above the conversion price. For example, a contingent convertible with a $10 stock price at issue, 30% conversion premium and a contingent conversion trigger of 120%, can be converted (at $13) only if the stock trades above $15.60 ($13 x 120%) over a specified period, often 20 out of 30 days before the end of the quarter.

The co-co feature was often favored by issuers because the shares of underlying common stock were only required to be included in diluted EPS calculation if the issuer's stock traded above the contingent conversion price. In contrast, non-co-co convertible bonds result in an immediate increase in diluted shares outstanding, thereby reducing the EPS. The impact to diluted shares outstanding is calculated using the "as-if-converted" method, which requires the most conservative EPS value be used. Recent changes to GAAP have eliminated the favorable treatment of co-co's, and as a result their popularity with issuers has waned.

• Convertible preferred stock is similar in valuation to a bond, but with lower seniority in the capital structure.

See also: convertible preferred stock

Diluted EPS is a companys EPS figure as calculated using fully diluted shares outstanding (i. ... This article or section does not cite its references or sources. ... convertible preferred stock ...

Valuation

In theory, the market price of a convertible debenture should never drop below its intrinsic value. The intrinsic value is simply the number of shares being converted at par value times the current market price of common shares. Market price is an economic concept with commonplace familiarity; it is the price that a good or service is offered at, or will fetch, in the marketplace; it is of interest mainly in the study of microeconomics. ... In options terminology, an option has intrinsic value, if it is in-the-money. ... This article or section does not adequately cite its references or sources. ... Par value has several meanings depending on the context, whether used in the equities market, or in the bond markets, and partially also dependent on where in the world the par value term is used. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

From a valuation perspective, a convertible bond consists of two assets: a bond and a warrant. Valuing a convertible requires an assumption of 1) the underlying stock volatility to value the option and 2) the credit spread for the fixed income portion that takes into account the firm's credit profile and the ranking of the convertible within the capital structure. Using the market price of the convertible, one can determine the implied volatility (using the assumed spread) or implied spread (using the assumed volatility). In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... For other uses of the term Warrant, see Warrant (disambiguation) A warrant is a security that entitles the holder to buy or sell a certain additional quantity of an underlying security. ...

This volatility/credit dichotomy is the standard practice for valuing convertibles. What makes convertibles so interesting is that, except in the case of exchangeables (see above), one cannot entirely separate the volatility from the credit. Higher volatility (a good thing) tends to accompany weaker credit (bad). The true artists of convertibles are the people who know how to play this balancing act.

A simple method for calculating the value of a convertible involves calculating the present value of future interest and principal payments at the cost of debt and adds the present value of the warrant. However, this method ignores certain market realities including stochastic interest rates and credit spreads, and does not take into account popular convertible features such as issuer calls, investor puts, and conversion rate resets. The most popular models for valuing convertibles with these features are finite difference models such as binomial and trinomial trees. For other senses of this word, see interest (disambiguation). ... The cost of debt is the cost of borrowing money (usually denoted by Kd). ... For other uses of the term Warrant, see Warrant (disambiguation) A warrant is a security that entitles the holder to buy or sell a certain additional quantity of an underlying security. ...

Uses

Convertible bonds are safer than preferred or common shares for the investor. A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ...

Convertible bonds can be sold short, thus depressing the market value for a stock, and allowing the debt-holder to claim more stock with which to sell short. This is known as death spiral financing. It has been suggested that Short (finance) be merged into this article or section. ... Death spiral financing occurs when a small company, in desperate need of money, takes an investors cash, but with a caveat. ...

The simultaneous purchase of convertible bonds and the short sale of the same issuer's common stock is a hedge fund strategy known as convertible arbitrage. Convertible arbitrage is an investment strategy often associated with hedge funds. ...

2007YTD Global Equity-Linked Underwriting League Table

Source: Bloomberg

2006 Global Equity-Linked Underwriting League Table

Source: Bloomberg

External links

• Pricing Convertible Bonds using Partial Differential Equations - by Lucy Li

See also

• Convertible security
• Convertible preferred stock
• Exchangeable bond

A convertible security is a security (finance) that can be converted into another security, for example a bond that under certain terms can be converted into equity. ... convertible preferred stock ... In finance, an exchangeable bond (or XB) is a straight bond with an imbedded option to exchange the bond for the stock of a company other than the issuer (usually a subsidiary) at some future date and under prescribed conditions. ...