Busted Convertible

Busted convertible

Related: Fixed income equivalent. Mainly applies to convertible securities. Convertible bond selling essentially as a straight bond. Assuming the issuer is "money good," or will continue to meet credit obligations, such issues can be highly attractive since the price makes virtually no allowance for the bond's call on the common stock, when most such issues usually carry premiums.

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Busted Convertible Security

A convertible security in which the underlying stock is trading 50% or more below the value of the convertible option. This renders the convertible option nearly worthless, and the security acts like common debt. This is considered a low risk investment with the possibility of high return because a busted convertible usually has a fixed return, and there is a small chance that the stock will recover allowing the investor to exercise the convertible option.

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busted convertible

A convertible bond on which the stock into which the bond is convertible has fallen so far below the conversion price that the convertible bond trades in the market as regular debt. For example, if a convertible bond is convertible into stock at a price of $40 per share when the stock sells at only $7 per share, the conversion feature has such little value that the bond will be priced to offer investors a yield nearly equal to that from a bond with similar risk and maturity but without a conversion feature.