Convertible Bond
A convertible bond is a type of corporate bond that gives the holder the option to convert the bond into a predetermined number of shares of the issuing company’s stock. Convertible bonds offer the security of fixed interest payments while providing the potential upside of converting to equity if the company’s stock price rises. This type of bond is typically issued by companies to raise capital while offering investors the flexibility to participate in equity gains.
Example
An investor holds a convertible bond with a conversion ratio of 10:1, meaning they can convert each bond into 10 shares of the company’s stock if the stock price rises above the bond's conversion price.
Key points
• Convertible bonds can be converted into a set number of shares of the issuing company’s stock.
• They offer fixed interest payments with the potential for equity upside.
• Convertible bonds are used by companies to raise capital while offering investors flexibility.
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