Convertible Pricing
What is a Convertible?
A convertible note combines features of traditional debt with an embedded equity option.
- Debt Component: Typically pays a coupon (interest) and returns principal at maturity, similar to a regular bond
- Equity Component: Investors can convert the debt into equity shares if the stock price rises above a certain threshold (the conversion price)
Why Volatility Matters
The embedded option in a convertible is most valuable when the underlying stock is highly volatile. Higher volatility increases the likelihood that the stock price might surpass the conversion price by a significant margin, granting the investor potential for larger upside via equity.
- Option Premium: Just like a standalone call option, the higher the expected volatility → the more valuable the call option becomes
- Interest Rate: Issuers of convertibles can often offer lower interest rates when volatility is high, because investors are attracted to the potential upside in the embedded option
In MicroStrategy's case, Bitcoin's volatility flows through to its stock price. As Bitcoin swings wildly, so does the perceived value of MicroStrategy's treasury – and thus $MSTR. This volatility supports the pricing of MSTR convertibles, influencing how much yield investors demand and how much capital the company can raise at favorable terms.
Key Takeaway
Embrace Volatility
Like MicroStrategy, MegaStrategy capitalizes on volatility as a growth catalyst. However, instead of relying on centralized issuance of corporate debt, MegaStrategy employs onchain mechanisms to achieve leveraged exposure to digital assets.