Zero-coupon Corporate Convertible Bonds

These securities are bonds with a deep discount and conversion provisions. These security yields tend to be lower than those of conventional bonds, and do not pay annual interest.

Holders are required to accrue interest because of federal taxes, and how with zero-coupon conventional bonds, are tailor-made for tax-deferred accounts such as IRAS, 401(K)s and pension plans.

As in convertible bonds, these securities can be exchanged by an predetermined number of common stock issued by the corporation.

The largest producer of semi-conduits in Europe, ST Microelectronics NV, issued $1.2 billions in zero-coupon convertible bonds with maturity in 2010 in July 2003.

Some zero-coupon convertibles have put options that allow holders to resell their securities to the issuer at the original issuing price plus an accrued interest after a predetermined date (usually 5 or 10 years). The call provisions in many of the zero-coupon convertible securities have resulted against investors.

Walt Disney’s zero-coupon convertible securities that were scheduled at maturity  (2005) were called many years after issuance at a price that was lower than what many investors had paid in the secondary market when buying the company?s zero-coupon convertibles.

The conversion feature did not help Disney’s zero-coupon convertible bondholders because securities were tied up to EuroDisney?s stocks being negotiated in the  Paris Exchange, which was depressed and negotiations were way below conversion price.

When the rate of interest of the market decline many companies redeem their zero-coupon convertible issues and issue new conventional bonds with lower coupon yields.

The advantage of zero-coupon convertible bonds is their upside potential to appreciation if the common stock raises above conversion price. However, if conversion does not occur, the holder receives a lower return than with a similar-maturity “plain vanilla” bond (regular bond).

Beginner Money Investing Zero-Coupon Bonds Relationships Influencing the Price of Zero-Coupon Bonds Types of Zero-Coupon Bonds and Government Securities Mortgage-backed and Municipal Zero-coupon Bonds Zero-coupon Corporate Convertible Bonds What are the Risks of Zero-coupon Bonds Advantages and Disadvantages of Zero-coupon Bonds