Convertible Bond

Convertible bond

General debt obligation of a corporation that can be exchanged for a set number of common shares of the issuing corporation at a prestated conversion price.

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Convertible Bond

A bond that a bondholder may exchange, at a certain price, for common stock in the company issuing the bond. The number of shares one receives for each bond and the price one pays for those shares are determined when the convertible bond is issued. A convertible bond is a low-risk investment, but it affords the investor a great amount of leeway because he/she can exchange it for another security with higher risk and a higher return. Certain convertible bonds may only be exchanged at certain points in their lives. The extent to which bondholders exchange convertible bonds is sometimes seen as an indication of whether the share price is overvalued or undervalued. See also: Busted convertible, Overhanging bond, Convertible preferred stock.

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Convertible bond. Convertible bonds are corporate bonds that give you the alternative of converting their value into common stock of that company or redeeming them for cash when they mature.

The details governing the conversion, such as the number of shares of stock you would receive, are set when the bonds are issued.

A convertible bond has a double appeal for investors. Its market value goes up if the stock price rises, but falls only to what it would be as a conventional bond if the stock price falls. In other words, the upside potential is considered greater than the downside risk.

While convertible bonds typically provide lower yields than conventional bonds from the same issuer, they may provide higher yields than the underlying stock.

You can buy convertibles through a broker or choose a mutual fund that invests in them.

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Convertible Bond

What Does Convertible Bond Mean?

A bond that can be converted into a predetermined amount of equity at certain times during its life, usually at the discretion of the bondholder; convertibles sometimes are called CVs.

Investopedia explains Convertible Bond

Issuing convertible bonds is one way for a company to minimize negative investor sentiment toward its corporate actions. For example, if a public company chooses to issue stock, the market usually interprets it as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders probably will convert to equity anyway if the company continues to do well. From the investor's perspective, a convertible bond has a value-added component built into it because it is essentially a bond but with a stock option hidden inside. However, it tends to offer a lower rate of return in exchange for the value of the option to convert the bond into stock.

Related Terms:
• Bond
• Convertible Preferred Stock
• Dilution
• Fully Diluted Shares
• Shareholders' Equity