A:

The first step to answering this question requires defining the term "private corporation". Many times, the term "private corporation" refers to a privately held company that is either a sole proprietorship (one owner) or a partnership (multiple owners). Other times, it refers to a business that's actually incorporated under state laws, but not traded on any exchange or by over-the-counter market makers.

In the instance of a truly private company that is owned by one or multiple people, convertible bonds cannot be issued. The reason has less to do with any laws against privately held companies issuing bonds and more to do with the fact that no shares of stock exist into which to convert the bonds.

On the other hand, a closely-held subchapter S or C corporation, which does not trade on any exchange, theoretically may issue convertible bonds if allowed by its corporate charter and state laws. The feasibility of executing a bonds issue of this kind is another matter, however, because many closely held corporations might have only 100 shares of stock outstanding, if not less. It is not unheard of for an owner or local investor to lend smaller corporations money in the form of bonds that come with a convertible feature. However, this usually is carried out as a means of protecting the lender by permitting ownership in the company if it fails to repay the loan.

(For more on this topic, read Convertible Bonds: An Introduction and Should You Incorporate Your Business?)

This question was answered by Ken Clark.

RELATED FAQS
  1. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
  2. What is the difference between convertible and reverse convertible bonds?

    The difference between a regular convertible bond and a reverse convertible bond is the options attached to the bond. While ... Read Answer >>
  3. What is a convertible bond?

    A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade ... Read Answer >>
  4. How do I use a premium put convertible?

    Holders of convertible bonds face all the pitfalls that traditional bondholders face - liquidity risk, interest rate risk ... Read Answer >>
Related Articles
  1. Investing

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  2. Investing

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  3. Financial Advisor

    Is Now the Time for Convertible Bonds?

    Convertible bonds offer a competitive rate of return in what is a very tough market right now. Here's how they work.
  4. Financial Advisor

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  5. Investing

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  6. Managing Wealth

    How To Invest In Private Companies

    It can be tough to invest in a company that doesn't trade on an exchange, but there are also several advantages.
  7. Investing

    Advantages of Public Vs. Private Companies

    A privately held company is owned by its founder, management or a group of private investors.
  8. Investing

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  9. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  10. Investing

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between an investor and a corporation.
RELATED TERMS
  1. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  2. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
  3. Revertible

    Refers to a special kind of convertible corporate bond that automatically ...
  4. Going Private

    A transaction or a series of transactions that convert a publicly ...
  5. Convertible Bond Arbitrage

    An arbitrage strategy that aims to capitalize on mispricing between ...
  6. Foreign Currency Convertible Bond - FCCB

    A type of convertible bond issued in a currency different than ...
Hot Definitions
  1. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
  2. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  3. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  4. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  5. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
  6. Phishing

    A method of identity theft carried out through the creation of a website that seems to represent a legitimate company. The ...
Trading Center