Convertible Bond
A bond that can be converted into a set number of the issuer's shares.
What is Convertible Bond?
A convertible bond is a fixed-income security that gives the holder the option to convert the bond into a predetermined number of the issuer's common shares at a set conversion price. Because of this equity upside, convertible bonds typically offer lower coupon rates than equivalent straight bonds. They behave like bonds when the stock price is below the conversion price and like equity when the stock rises above it. Companies issue convertibles as a cheaper financing method; investors accept the lower yield for the embedded call option on the equity.
Example
A company issues a $1,000 convertible bond with a 2% coupon, convertible into 20 shares (conversion price $50). If the stock rises to $70, conversion is worth $1,400 — well above the $1,000 bond value.