ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Finance: What is Busted Convertible? 14 Views


Share It!


Description:

What is a Busted Convertible? A busted convertible is a convertible bond that will never be converted to stock because the underlying stock price is so much lower than the conversion price, so it is cleverly referred to as busted.

Language:
English Language

Transcript

00:00

Finance a la shmoop..what is a busted convertible?

00:06

well techno growth forever biotechs swore to its customers that upon death they [Mans head enters into a glass jar]

00:12

could sever their heads freeze them and in 40 years they would have technology

00:16

to have them reborn into a really cool robot body and yeah kim kardashian model

00:22

was a huge huge hit we cannot lie.... The company stocks zoomed to a hundred

00:27

dollars a share and management needed cash to open offices in China Latin [Cash travels around the world]

00:32

America and Africa but they didn't want to suffer dilution by just selling

00:36

equity or part ownership in themselves to the street at least not at the

00:41

hundred dollar share price they really just wanted to borrow money [Cash and an IOU note appears on a table]

00:44

to fund these new offices because well they thought their stock would easily

00:48

get to $250 a share in the next few years

00:52

tons of people out there who wanted to you know live forever

00:55

you know like fame.....nevermind their bankers were nervous about how

01:00

investors would react to just a straight bond which carried 8% interest so

01:05

instead they kind of compromised by doing a convertible preferred stock [Men give handshake]

01:10

offering they sold preferred stock to the street that carried just 3% interest

01:15

but those preferred shares were convertible into common stock at a

01:19

hundred seventy five bucks a share so the owners of the preferred would keep [Stock value of biotech company rises]

01:23

clipping their three percent coupons until one day the stock hit a hundred

01:27

seventy five bucks or better well and then they could participate in the

01:31

[Man hits a baseball] upside if the stock really was a homerun but sadly as many things do in shmoop

01:36

video....Test came back from the early decapitating trials and well they were

01:40

oh so not good legions of zombies began to roam the streets and while consumers [Zombies walking along the streets]

01:45

just didn't want to go there they'd rather truly rest in peace so the stock

01:49

cratered down to $20 a share where it would sit for all eternity in what is

01:54

called a busted convertible and took us a while to get there but we got

01:58

there the convertible preferred would pay 3% a year in interest as it always [Preferred stock with 3% interest sticker]

02:03

had and a convertible stock is so far below the conversion price of $175 well,

02:09

investors assume it will never convert the investment case views

02:13

the convert solely as a preferred or kind of like a bond offering against

02:17

competitive bond interest rates so yeah that's a busted convertible although so

02:23

is this they really never should have given robot Kim K a driver's license [Robot Kim Kardashian beside an upside down, crashed car]

Up Next

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Related Videos

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...