Define: Convertible Bond

A convertible bond is a type of bond that can be converted into a predetermined number of shares of the issuing company’s common stock at the bondholder’s discretion.

When a convertible bond is issued, it functions like a regular bond, paying periodic interest to the bondholder. However, at a later date, the bondholder has the option to convert the bond into a specified number of shares of the issuing company’s stock.

Convertible bonds offer the potential for both fixed income from the bond’s interest payments and the opportunity for capital appreciation if the stock price of the issuing company increases. They provide a way for investors to participate in the company’s growth potential while still having downside protection through the bond’s fixed income.

Convertible bonds are initially issued as debt instruments, as they pay interest to bondholders. However, if the bondholder chooses to convert the bond into shares of stock, it becomes equity in the company.

Yes, convertible bonds can be bought and sold on the secondary market, just like regular bonds. The price of a convertible bond will fluctuate based on changes in interest rates, the stock price of the issuing company, and other market factors.

If a convertible bond is not converted by the bondholder, it will continue to function as a regular bond until its maturity date. At maturity, the bondholder will receive the face value of the bond, along with any remaining interest payments.

Like any investment, convertible bonds carry risks. The value of the bond can fluctuate based on changes in interest rates, the stock price of the issuing company, and other market factors. Additionally, if the issuing company experiences financial difficulties, there is a risk of default on the bond.

Convertible bonds may be suitable for investors seeking a balance between fixed income and potential equity upside. However, it is important for investors to carefully consider their investment objectives, risk tolerance, and consult with a financial advisor before investing in convertible bonds.

The conversion terms of a convertible bond, such as the conversion price and the number of shares to be received upon conversion, are typically determined at the time of issuance and are outlined in the bond agreement. These terms are influenced by factors such as the current stock price, interest rates, and the issuing company’s financial condition.