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 ?
Our third hypothesis is that the market's reaction to an announcement of a convertible bond offer varies with whether the firm truthfully reveals firm quality at the offer announcement.
3a]: The average wealth change following announcements of convertible bond issues that are subsequently converted into equity is significantly lower than that of issues that are not subsequently converted into equity.
We first identify all calls and redemptions of convertible bond issues between January 1968 and December 1988.
A convertible bond is characterized as being out-of-the-money if the conversion value is below the effective call price on at least one of the two days around either event.
This scenario tells us nothing about whether the original convertible bond could or would have been in the money if the firm had not called the issue for refunding purposes.
For each convertible bond remaining in our sample, we trace the debt issue back to the original issue date.
For mimicking to be effective, the convertible bond contract terms set by mimickers should be similar to those of other issuers.
If firms that subsequently call or redeem their convertible bonds out-of-the-money are lower-quality issuers mimicking higher-quality firms, they should, on average, be riskier than convertible bond issuers that obtain back-door equity financing.
One behavioral implication of these studies for our sample is that convertible bond offer announcements should follow information releasing events.
Since the results thus far are consistent with our hypothesis that some firms are mimickers, we now examine whether the market's reaction to a convertible bond offer announcement varies with whether or not the firm mimics higher-quality firms at offer announcement.
We determine the market model parameters by using daily returns on the CRSP tapes over a 150-day period that begins 350 days and ends 201 days prior to the announcement of the convertible bond issue.
Issuers of more traditional instruments like convertible bonds and employee stock options could be affected as well.