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Convertible Bonds

Definition of Convertible Bonds

A convertible bond is a hybrid security that’s initially designed to be a debt instrument that pays a fixed interest rate in exchange for a loan. Once the loan’s tenure ends, the holder can decide to take one of either action:

  • Don’t convert bond: face value of the bond is transferred to the holder on maturity
  • Related Terms

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    High volatility stocks are shares that fluctuate based on market conditions, typically more than others. The volatility could be a result of inherent fundamentals or other factors like the industry or domain. Identifying high volatility stocks is possible through indicators like Average True Range and Bollinger Bands.

    Equilibrium Price

    Equilibrium price is achieved when the demand is exactly equal to the supply. It is a state where buyers and sellers have enough goods and services to meet each other’s demands - not more, not less. One could say that equilibrium price is a perfectly balance state in the market.

    Expense Ratio

    An expense ratio is a management fee that investors must pay for the services of the fund manager and their team. Mutual funds are handled by fund managers who take care of everyday stock analysis, buying & selling, and other activities. The expense ratio is a fee to compensate for this day-to-day management.

    Liquidity Trap

    A Liquidity Trap is an economic event where the general public stashes cash in their bank savings account instead of investing in bonds because of the assumption that a rise in interest rates is imminent, even though interest rates are low.

    Interest Rate Futures

    Interest rate futures are derivative contracts whose underlying instrument is any instrument that bears interest.

    Just like any other futures contract, interest rate futures also give the right and obligation to fulfil the terms of the contract on expiry.

    The price of interest rate futures and the interest rate itself shares an inverse relationship. If interest rates move higher, then the futures will be less valuable.

    Annual Net Profit Margin

    A Net Profit Margin is the ratio of a company’s net profits to revenues. The formula to calculate Net Profit Margin is:

    Net Profit Margin = Net Profit* / Revenue * 100

    *Net profit = Revenue - Cost of goods - Operating Cost - Other Expenses - Interest - Taxes

    Net Profit Margin is expressed as a percentage, which means that you can compare the financial health of multiple companies.

    A company can use its Net Profit Margin to understand whether its strategies and business models are effective.



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