Convertible security

Corporate alliance. A cooperative deal that stops short of a merger; also called a strategic alliance.

• Corporate bond. Debt issued by corporations and exposed to default risk. Different corporate bonds have different levels of default risk, depending on the issuing company's characteristics and on the terms of the specific bond.
• Corporate governance. The set of rules that control a company's behavior toward its directors, managers, employees, shareholders, creditors, customers, competitors, and community.
• Corporate risk management. Managing unpredictable events that have adverse consequences for the firm. This effort involves reducing the consequences of risk to the point where there would be no significant adverse impact on the firm's financial position.
• Corporate valuation model. Defines the total value of a company as the value of operations plus the value of nonoperating assets plus the value of growth options.
• Correlation. The tendency of two variables to move together.
• Correlation coefficient, ρ (rho). A standardized measure of how two random variables covary. A correlation coefficient (ρ) of +1.0 means that the two variables move up and down in perfect synchronization, whereas a coefficient of −1.0 means the variables always move in opposite directions. A correlation coefficient of zero suggests that the two variables are not related to one another; that is, they are independent.
• Cost of common stock, rs. The return required by thefirm'scommonstockholders.It is usually calculated using Capital Asset Pricing Model or the dividend growth model.
• Cost of new external common equity, re. A project financed with external equity must earn a higher rate of return because it must cover the flotation costs. Thus, the cost of new common equity is higher than that of common equity raised internally by reinvesting earnings.
• Cost of preferred stock, rps. The return required by the firm's preferred stockholders. The cost of preferred stock, rps, is the cost to the firm of issuing new preferred stock. For perpetual preferred, it is the preferred dividend, Dps, divided by the net issuing price, Pn.
• Costly trade credit. Credit taken (in excess of free trade credit) whose cost is equal to the discount lost.
• Coupon interest rate. Stated rate of interest on a bond; defined as the coupon payment divided by the par value.
• Coupon payment. Dollar amount of interest paid to each bondholder on the interest payment dates.
• Coverage ratio. Similar to the times-interest earned ratio, but it recognizes that many firms lease assets and also must make sinking fund payments. It is found by adding earnings before interest, taxes, depreciation, amortization (EBITDA), and lease payments and then dividing this total by interest charges, lease payments, and sinking fund payments over 1 − T (where T is the tax rate).
• Cramdown. Reorganization plans that are mandated by the bankruptcy court and binding on all parties.

Convertible security is a bond or preferred stock that can be exchanged for (converted into) common stock, under specific terms, at the option of the holder. Unlike the exercise of warrants, conversion of a convertible security does not provide additional capital to the issuer.

Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Convertible security. Bonds or preferred stocks that can be exchanged for (converted into) common stock, under specific terms, at the option of the holder. Unlike the exercise of warrants, conversion of a convertible security does not provide additional capital to the issuer.

Related concepts

• Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.

Related lectures

• Introduction to Financial Management.