What is a “convertible note”?
Source, see if you have access to it Convertible notes are often used by angel investors who wish to fund businesses without establishing an explicit valuation of the company in which they are investing.    When an investor purchases equity in a startup, the purchase price of the equity implies a company valuation.  For example, if an investor purchases a 10 per cent ownership stake in a company, and pay $1m for that stake, this implies that the company is worth $10m. Some early stage investors may wish to avoid placing a value on the company in this way, because this in turn will affect the terms under which later-stage investors will invest in the company.  Convertible notes are structured as loans at the time the investment is made.  The outstanding balance of the loan is automatically converted to equity when a later equity investor appears, under terms that are governed by the terms set by the later-stage equity investor.  An equity investor is someone who purchases equity in a company. Example:- Suppose an angel investor invests $100,000 using a convertible note.  Later, an equity investor invests $1m and receives 10% of the company's shares.  In the simplest possible case, the initial angel investor's convertible note would convert to 1/10th of the equity investor's claim.  Depending on the exact structure of the convertible note, however, the angel investor may also receive extra shares to compensate them for the additional risk associated with being an earlier investor The worst-case scenario would be if the issuing company initially performed well, meaning that the debt would be converted into shares, and subsequently went bankrupt. The converted shares would become worthless, but the holder of the note would no longer have any recourse. Will twitter have to sell their offices and liquidate staff to close this debt? This depends on the seniority(priority) of the debt. Debt is serviced according to seniority. The higher seniority debts will be paid off first and then only the lower seniority debts be serviced. This will all be in the agreements when you enter into a transaction. When you say liquidate staff you mean sell off their assets and not sell their staff into slavery.
In this type of strategy profit is made when the shares go down as your main position is the short trade of the common stock. The convertible instruments will tend to move in about the same direction as the underlying (what it can be converted to) but less violently as they are traded less (lower volatility and lower volume in the market on both sides), however, they are not being used to make a profit so much as to hedge against the stock going up. Since both the bonds and the preference shares are higher on the list to be repaid if the company declares bankruptcy and the bonds pay out a fixed amount of interest as well, both also help protect against problems that may occur with a long position in the common stock.  Essentially the plan with this strategy is to earn fixed income on the bonds whilst the stock price drops and then to sell both the bonds and buy the stock back on the market to cover the short position. If the prediction that the stock will fall is wrong then you are still earning fixed income on the debt and are able to convert it into stock at the higher price to cover the short sale eliminating, or reducing, the loss made on the short sale. Effectively the profit here is made on the spread between the price of the bond, accounting for the conversion price, and the price of the stock and that fixed income is less volatile (except usually in the junk market) than stock. Sounds to me like this restriction is limited to banks as issuers of convertible debt, which may affect their compliance with capital requirements, but is unlikely to affect the overall market for convertible debt.  Also the restriction is limited to retail investors, and I think most convertible debt offerings are not aimed at retail investors, so this restriction seems pretty limited to me. Yep. You know, for banks to use against your deposits which are now legally interpreted as unsecured loans or some such. I don't think we can print big again. Happened in [Cyprus](http://rt.com/business/cyprus-crisis-bailout-deposit-631/). Tinfoil hat is optional. Its participating preferred with a 1x liquidation preference. Very unfriendly for the company owner. Most startups these days are seeded with convertible notes because there's less thinking about the valuation of the company; that question is booted to the series A. its also easier to draw up the legal docs; pretty much a standard loan agreement. Finally, it can be far friendlier for the owner depending on if the note is an uncapped note. This is expensive financing and your friend can definitely find cheaper money if he looks for it. "The first 3 are the same as owning stock in a company would be measured in shares and would constitute some percentage of the overall shares outstanding. If there are 100 shares in the company in total, then owning 80 shares is owning 80% is the same as owning 80% of the common stock. This would be the typical ownership case though there can also be ""Restricted stock"" as something to note here. Convertible debt would likely carry interest charges as well as the choice at the end of becoming stock in the company. In this case, until the conversion is done, the stock isn't issued and thus isn't counted. Taking the above example, one could have a note that could be worth 10 shares but until the conversion is done, the debt is still debt. Some convertible debt could carry options or warrants for the underlying stock as there was the Berkshire convertible notes years ago that carried a negative interest rate that was studied in ""The Negative Coupon Bond"" if you want an example here. Options would have the right but not the obligation to buy the stock where there are ""Incentive Stock Options"" to research this in more depth. In this case, one could choose to not exercise the option and thus no stock changes hands. This is where some companies will experience dilution of ownership as employees and management may be given options that put more shares out to the public. Issuing debt wouldn't change the ownership and isn't direct ownership unless the company goes through a restructuring where the creditors become the new stock holders in the case of a Chapter 11 situation in the US. Note that this isn't really investing in a small business as much as it is making a loan to the company that will be paid back in cash. If the company runs into problems then the creditor could try to pursue the assets of the company to be repaid." it means that 20% of my closing balance each day will be added up over the course of a month and then given once the month is over. Yes apart from the typo 0.20% of every day balance. The rate itself is quoted for a year, so for a day it will be (Px0.20)/(100x365). Where P = The principal amount of every day. The credits will be every month-end. For leap year will be 366. Check with your Bank quite a few Banks still use the old convention of 360 days in year. And the fact that if notes trade up high enough they tend to get taken out with lower yielding notes (pending the call schedule), so in theory there is more limited upside in high-yield, whereas equity could theoretically trade to infinity.  The positives for high-yield is that they generate monthly cash flow via coupon payments and have less down-side relative to equities. Naturally this lower down-side comes at the expense of lower up-side as well. "Since you want to know exactly what ""yield"" means, let's get all the details of the security down first. Treasury Bills are 0-1 year and do not pay interest/coupons. The yield comes from buying the T-Bill at a discount. For example, you buy a T-Bill for $99 and it pays $100 when it matures, and the yield over that holding period is 1/99. When people talk about ""yield"" they are generally talking about annualized yield unless stated otherwise.  Treasury Notes are 2-10 years. They pay interest semi-annually. Treasury Bonds are 20-30 years and they also pay interest semi-annually. Again, ""yield"" is typically the annualized yield, or the two semi-annual interest payments added together (without compounding). These have interest payments so they are typically sold at par. They may trade a premium/discount afterwards.  TIPS pay a constant coupon rate, but the principal is adjusted up and down with inflation." "By protected you mean what exactly? In the US, generally you'd get a promissory note signed by B saying ""B promises to repay A such and such amount on such and such terms"". In case of default you can sue in a court of law, and the promissory note will be the evidence for your case. In case of B declaring bankruptcy, you'd submit the promissory note to the bankruptcy court to get in line with all the other creditors. Similarly in all the rest of the world, you make a contract, you enforce the contract in courts." "Bingo, great question.  I'm not the original poster, ""otherwiseyep"", but I am in the economics field (I'm a currency analyst for a Forex broker).  I also happen to strongly disagree with his posts on the origin of money.  To answer your question:  the villagers are forced to use the new notes by their government, which demands that their income taxes be paid with the new currency.  This is glossed over by otherwiseyep, which is unfortunate because it misleads people who are new to economics into believing the system of fiat money we have now is natural/emergent (created from the bottom-up) and not enforced from the top-down.  Legal tender laws enforced in each nation's courts mean that all contracts can be settled in the local fiat currency, regardless of whether the receiver of the money wants a different currency.  These laws (and the income tax) create an artificial ""root demand"" for the fiat currency, which is what gives it its value.  We don't just *decide* that green paper has value.  We are forced to accumulate it by the government.  Fiat currencies are not money.  We call them money, but in fact they are credit derivatives.  Let me explain:  A currency's value is inextricably tied to the nation's bond market.  When investors buy a nation's bonds, they are loaning that nation money.  The investor expects to receive interest payments on the bonds.  The interest rate naturally rises as the bonds are perceived to be more-risky, and naturally falls as the bonds are perceived to be less-risky.  The risk comes from the fact that governments sometimes get really close to not being able to pay their interest payments.  They get into so much debt, and their tax-revenue shrinks as their economy worsens.  That drives up the interest rate they must pay when they issue new bonds (ie add debt).  So the value of a currency comes from tax revenue (interest payments).  If a government misses an interest payment, or doesn't fully pay it, the market considers this a ""credit event"" and investors sell their bonds and freak out.  Selling bonds has the effect of driving interest rates even higher, so it's a vicious cycle.  If the government defaults, there's massive deflation because all debt denominated in that currency suddenly skyrockets due to the higher interest rates.  This creates a chain of cascading defaults - one person defaults, which leads another person, and another, and so on.  Everyone was in debt to everyone else, somewhere along the chain.  In order to counteract this deflation (which ultimately leads to the kind of depression you saw in 1930's US), governments will print print print, expanding the credit supply via the banks.  So this is what you see happening today - banks are constantly being bailed out all over the Western world, governments are cutting programs to be able to meet their interest payments, and central banks are expanding credit supplies and bailing out their buddies.  Real money has ZERO counterparty risk.  What is counterparty risk?  It's just the risk that the guy who owes you something won't honor his debt.  Gold and silver and salt and oil aren't IOU's.  So they can be real money." This site has the best information I could find, other than a Bloomberg terminal:    Quantumonline.com QUANTUMONLINE.COM SECURITY DESCRIPTION:  SCANA Corp., 2009 Series A, 7.70% Enhanced Junior Subordinated Notes, issued in $25 denominations, redeemable at the issuer's option on or after 1/30/2015 at $25 per share plus accrued and unpaid interest, and maturing 1/30/2065 which may be extended to 1/30/2080. Interest distributions of 7.70% ($1.925) per annum are paid quarterly on 1/30, 4/30, 7/30 & 10/30 to holders of record on the record date which is the business day prior to the payment date (NOTE: the ex-dividend date is at least 2 business days prior to the record date). Distributions paid by these debt securities are interest and as such are NOT eligible for the preferential 15% to 20% tax rate on dividends and are also NOT eligible for the dividend received deduction for corporate holders. Units are expected to trade flat, which means accrued interest will be reflected in the trading price and the purchasers will not pay and the sellers will not receive any accrued and unpaid interest. The Notes are unsecured and subordinated obligations of the company and will rank equally with all existing and future unsecured and subordinated indebtedness of the company. See the IPO prospectus for further information on the debt securities by clicking on the ‘Link to IPO Prospectus’ provided below. I don't know much about the convertible debt space, but it seems like this regulation may be a positive sign that the government is being proactive in preventing financial institutions from developing overly complex debt structures (at least on an on-going basis) that get the global economy back into trouble.  Does anyone with a more informed opinion than my own have something to share? Risk is reduced but isn't zero The default risk is still there, the issuer can go bankrupt, and you can still loose all or some of your money if restructuring happens. If the bond has a callable option, the issuer can retire them  if conditions are favourable for the issuer, you can still loose some of your investment. Callable schedule should be in the bond issuer's prospectus while issuing the bond. If the issuer is in a different country, that brings along a lot of headaches of recovering your money if something goes bad i.e. forex rates can go up and down. YTM, when the bond was bought was greater than risk free rate(govt deposit rates) Has to be greater than the risk free rate, because of the extra risk you are taking. Reinvestment risk is less because of the short term involved(I am assuming 2-3 years at max), but you should also look at the coupon rate of your bond, if it isn't a zero-coupon bond, and how you invest that. would it be ideal to hold the bond till maturity irrespective of price change It always depends on the current conditions. You cannot be sure that everything is fine, so it pays to be vigilant. Check the health of the issuer, any adverse circumstances, and the overall economy as a whole. As you intend to hold till maturity you should be more concerned about the serviceability of the bond by the issuer on maturity and till then. Chinese currency is not freely convertible. Its exchange rate is not determined by the market but rather by the Chinese government. Thus the counter-intuitive result. In essence, the Chinese government is subsidizing exports (which is reasonable since exports is what drives the Chinese economy). "MBS is a fairly general term ""Mortgage Backed Securities"" which simply means that the bond is collateralized with mortgages.  Pass throughs are a type of MBS that is untranched: all bond holders of the deal are receiving the same interest and principal payments, there is no senior or subordinate class of bonds.   Agency passthroughs bond holders receive any principal and interest payments paid by the loans in the pool, minus a slice of the interest payment that pays billing and insurance fees (servicing and guarantee fees, usually a .5% slice of the mortgage interest rate).  On agency product (including Ginnies), if a loan defaults it will be bought out of the pool, with the bondholder receiving all of the expected principal and any interest due on the loan.  Agency deals with different classes of bonds are usually called REMICs.  Passthrough may also be split into  principal-only (PO) and interest-only (IO) pieces.   There is also a huge forward market in soon-to-be-issued passthroughs called the TBA market.  Ginnie Mae has two slightly different programs referred to as Ginnie I and Ginnie II.  Ginnie also has commercial and construction loan financial products.  Freddie and Fannie have the same type of financial products as Ginnie, but there are differences in the sort of loans that Ginnie has vs the other agencies, as well as subtle minor differences between the contract terms of the securities.  Ginnie is also more explicitly guaranteed by the federal government.  You may want to look at:  http://www.ginniemae.gov/index.asp (especially the ""For Investors"" and ""For Issuers"" sections.)  Wikipedia's MBS may be more clear than my description: http://en.wikipedia.org/wiki/Mortgage-backed_security#Types"