Recently we have heard about the case of Salim family, PT Indocement Tunggal Prakarsa (INTP) with the convertible bond issued by Polymax International. What does convertible mean?

Convertible bonds are actually not much different from common bonds, namely the promissory notes giving coupon, which has maturity date, and par value. The difference is that it could be converted to issuer stock or subsidiary stock from the issuer, with certain additional requirements that are different one another.

For example: convertible bond of Polymax International that could be changed to common bond on February 27 2001.

The benefit of having this kind of convertible bond, the bond holder could choose which bond wanted to be changed into stock or not on the given date.

If the banking interest rate is predictably lower than the bond coupon rate, the convertible bond had better not be changed. Moreover, if the bond purchased with discount, the bondholder can get the payment with par value. And, if the bond price is likely to increase in market, the bond holder can get capital gain as he/she sell the bond with higher price.

However, if the issuer or subsidiaries of the issuer could predictably reach high profit, the bond had better changed, since besides getting much dividend, he can also get capital gain if the stock price surged higher than the stock price when it is converted.

The problem is how to predict the banking interest rate and the company's performance in the future. That is the risk that should be faced by convertible bond holder. Therefore, be careful to make decision in converting.

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