Zero-Coupon Convertible Security

Zero-coupon convertible security

A zero-coupon bond convertible into the common stock of the issuing company after the stock reaches a certain price, using a put option inherent in the security.
Also refers to zero-coupon bonds, which are convertible into an interest bearing bond at a certain time before maturity.

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Zero-Coupon Convertible Security

1. A bond that may be converted into common stock in the company issuing it. A zero-coupon convertible bond is sold at a discount from par and matures at par. They tend to be volatile in the secondary market because the convertible option may or may not become worthwhile, depending on how the company is doing. Additionally, like all zeros, they can fluctuate in price, sometimes dramatically, with changes in interest rates.

2. A municipal bond that may be converted into corporate bonds. A zero-coupon convertible bond is sold at a discount from par and matures at par. They tend to be volatile in the secondary market because the convertible options may or may not become worthwhile, depending on how the companies they represent are doing. These zero-coupon convertibles are tax-exempt, but are convertible to other bonds that may yield more.