High-Return Investment Products - Bonds Linked to Stocks

Those who subscribed to Hyundai Rotem's 30th convertible bond issue in 2020 bought the bond at 10,000 won and sold it at 13,500 won in less than 2 months, earning a 35% return in under 2 months.
Like this, when we invest, we can easily come across terms such as exchangeable bonds, convertible bonds and bonds with warrants in the news or in disclosures.
These bonds are classified as bonds, but they have characteristics that differ from ordinary bonds.
Let's take a look at what features they have.
A convertible bond is a bond that can be exchanged for shares of the issuing company.
An ordinary bond is a product that pays only a fixed interest, but a convertible bond has the feature of being convertible into shares.
Because of this, the company can issue bonds on more favorable terms than ordinary bonds.
For example, if Company A issues convertible bonds to Investor B, Company A can issue them at a lower interest rate than other bonds.
For the company, interest costs go down.
And for the investor, the interest received is smaller, but if the company's share price rises above the conversion price, they can convert to shares and earn a capital gain from the share price.
Even if investors receive less interest, they can expect high returns if the stock rises, so they buy these bonds despite the low interest.
For the company, the moment the bonds are converted into shares, the debt it must repay to investors disappears, so its financial structure improves.
In short, if a company issues convertible bonds and they are converted into shares, the company no longer has money to repay.
Generally, when convertible bonds are issued, there is a high probability that they will affect the share price.
This can be interpreted as either bad or good news; generally, when convertible bonds are issued, new shares are issued as in a rights offering and the number of shares increases, so it is interpreted as bad news.
However, if the convertible bond proceeds are used to invest in new businesses in a way that raises expectations for the company's growth, it may be interpreted as good news.
Convertible bonds have an exercise period during which they can be converted into shares, and conversion is possible only during this period.
If the conversion period arrives while the share price is elevated, selling volume is likely to increase, so the share price is likely to undergo a correction.
Convertible bonds are a method companies often use when it is difficult to obtain bank loans.
Naturally, it would not be easy for them to issue bonds at a low interest rate. So it is also a method widely used to lower the interest rate.
In Korea, 70% of bonds that can be converted into shares are issued as convertible bonds, and investors should be especially careful to check the conversion period during which bonds can be converted into shares.
An exchangeable bond can be considered to work on the same principle as a convertible bond.
The big difference, however, is that while a convertible bond can only be exchanged for shares of the issuing company, an exchangeable bond can be exchanged for shares of another company held by the issuer.
For example, if Company A issues exchangeable bonds and, as the exercise condition, offers shares of Company B rather than its own shares, the investor gains the right to exchange them for Company B shares.
This is often used as a means of turning into cash a non-core asset held by Company A — Company B shares — by offering it as collateral.
Therefore, when exchangeable bonds are issued, investors should also look at which company's shares they will be exchanged for.
If the issue size is large, investors should also be cautious about investing in that stock during the exchange period.
A bond with warrants is a bond that grants the right to buy shares at a set price.
With convertible bonds or exchangeable bonds, the bond itself is extinguished once it is converted into shares, but with bonds with warrants, the bond remains and only the right to buy shares disappears.
Because the bond and the right to buy shares come together, these can be issued at a lower interest rate than convertible bonds or exchangeable bonds.
These bonds can be deals on favorable terms for both the company and investors, but if the share price falls, they deliver returns worse than ordinary bonds.
Those who invest in bonds for their original purpose should judge carefully before investing.