Convertible bond


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Related to Convertible bond: Callable 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.

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.

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.

References in periodicals archive ?
In a concurrent buyback, Petropavlovsk offered USD1,080 per USD1,000 of existing USD100 million 9.00% convertible bonds due in 2020.
RH: Typically, a convertible bond is issued between a three and seven year term-an average of a five-year lifetime for the option of the underlying share to go well and to convert with a profit.
HH: In summary, there is a lower coupon than on a straight bond, achieving a higher equity price than current levels if it is converted--these are the interesting aspects of convertible bonds from a treasury perspective.
We account for credit risk in the spirit of the methodology in Jarrow and Turnbull [10], where the credit risk is described by the default probability and the recovery value of the convertible bond by arbitrage-free valuation techniques.
Then the price process {[X.sub.t], 0 [less than or equal to] t [less than or equal to] T} of convertible bond satisfies the following reflected BSDE with "obstacle" {[CP.sub.t], 0 [less than or equal to] t [less than or equal to] T}:
The results of the simultaneous equations analysis indicate that the significant impact of investor demand on convertible bond issue volumes is robust to controlling for convertible bond pricing.
Income received from a convertible bond or preferred stock is subject to ordinary income tax rates.
Thompson, 1985, "Explaining Yield Savings on New Convertible Bond Issues", Quarterly Journal of Business and Economics, 24:92-104
So when General Motors floated an innovative $17.6 billion bond issue--including a $4 billion chunk of so-called contingent convertible bonds that will reinforce its pension plan--guys in the green eyeshades asked themselves: Is this a way to slay the pension monster?
However, Sweeney says there's a caveat: "Many convertible fund managers I've talked to say they are disappointed with some of the issues coming to market in recent months, so there could be somewhat of a drop-off in performance." That said, a convertible bond fund investment with an experienced firm may provide some upside in a stock market that still has investors scratching their heads.
Convertible arbs have been among the top-performing hedge funds, gaining over 25 percent in 2000 and more than 6 percent in 2001's first quarter, according to the CSFB/ Tremont Convertible Arbitrage index, Credit Suisse First Boston estimates that half of all convertible bond trades now come from hedge funds.
although it is too early to say that Japanese companies as a whole are leaning towards equity financing," said Michiro Naito, a convertible bond analyst at Merrill Lynch in Tokyo.