Carrot-and-Stick Bond is a convertible bond with a "carrot and stick" condition. "Carrot" is expressed in a lower than usual premium for conversion into stock. "Stick" is the issuer’s right to withdraw an issue with a specified premium if the stock value exceeds a certain percentage of the conversion price.
• it is a hybrid product which combines a debt instrument and a call option on the issuer’s stocks;
• the idea of issuing such an instrument is to attract investors who are interested not only in obtaining a fixed income but also in increasing their capital investments in the event of an increase in the value of the issuer’s stock;
• a simple structural product that is not burdened with high commissions;
• the holder may experience both incentive and punitive consequences depending on the actions they take which are determined by their investment strategy;
• the number of stocks that can be received from the conversion of each bond is determined by the conversion rate or conversion premium.
Advantages for the investor:
• stable coupon yield and the opportunity to get company stocks at a price below the market price;
• the premium on the current market price is fixed at such a level that no significant increase in the value of the stock is required to make the conversion profitable;
• the opportunity to get potentially higher returns with minimal risks;
• guaranteed return on investment.
Advantages for the issuer:
• debt service cost is lower due to low coupon payments;
• the minimum price at which stocks will be placed is fixed.
• low coupon yield;
• the issuer may withdraw bonds forcedly;
• for the issuer: the risk of selling shares at a price significantly lower than the market price;
• for the issuer’s shareholders: the issue of convertible bonds poses a risk of dilution of shares.
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