Zero-Coupon Convertible Bond

Zero-Coupon Convertible Bond

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 performing. 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 a corporate bond 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 options may or may not become worthwhile, depending on how the companies they represent are performing. These zero-coupon convertibles are tax-exempt, but are convertible to other bonds that may yield more.

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Zero-coupon convertible bond. A zero-coupon convertible bond, like other convertible bonds, can be converted into stock in the issuing corporation if the stock reaches the trigger price.

Municipalities may issue tax-exempt zero-coupon convertible bonds you can exchange before maturity for conventional taxable bonds.

The advantage of both taxable and tax-exempt zero-coupon convertibles is that they give you access to a potentially substantial gain for a small initial investment since you purchase the zero-coupon for less than the face value. But like all zero-coupons, these convertibles tend to be more volatile in the secondary market than nonconvertible bonds.