how foreign currency convertible bonds work
a foreign currency convertible bond fccb is a convertible bond that is issued in a foreign currency which means the principal repayment and periodic coupon payments will be made in a foreign currency for example an american listed company that issues a bond in india in rupees has in effect issued an fccb foreign currency convertible bonds are typically issued by multinational companies operating in a global space and looking to raise capital in foreign currencies fccb investors are usually hedge fund arbitrators and foreign nationals these bonds can be issued along with a call option whereby the right of redemption lies with the bond issuer or put options whereby the right of redemption lies with bondholder special considerationsa company may decide to raise money outside its home country to gain access to new markets for new or expansionary projects fccbs are generally issued by companies in the currency of those countries where interest rates are usually lower than the home country or foreign country economy is more stable than the home country economy due to the equity side of the bond which adds value the coupon payments on the bond are lower for the issuer than a straight coupon bearing plain vanilla bond thereby reducing its debt financing costs in addition a favorable move in the exchange rates can reduce the issuer s cost of debt which is the interest payment made on bonds since the principal has to be repaid at maturity an adverse movement in exchange rates in which the local currency weakens can cause cash outflows on repayment to be higher than any savings in interest rates resulting in losses for the issuer in addition issuing bonds in a foreign currency exposes the issuer to any political economic and legal risks prevalent in the country furthermore if the issuer s stock price declines below the conversion price fccb investors will not convert their bonds to equity which means the issuer will have to make the principal repayments at maturity an fccb investor can purchase these bonds at a stock exchange and has the option to convert the bond into equity or a depositary receipt after a certain period of time investors can participate in any price appreciation of the issuer s stock by converting the bond to equity bondholders take advantage of this appreciation by means of warrants attached to the bonds which are activated when the price of the stock reaches a certain point 