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Investment instrument that grants its holder the right to exchange it for the common stock of a firm other than the issuer of the instrument.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
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.
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