A
bond or
preferred stock that may be exchanged for
common stock in the company
issuing the exchangeable security at a certain ratio and/or a certain
price. A convertible security gives the
holder a great deal of flexibility. It reduces
risk by guaranteeing a
coupon payment or
dividend while also allowing the holder to take advantage of a potentially larger
return through the ability to convert the security to common stock. It is less commonly called an exchangeable security. See also:
Convertible Option.