Definition

1. Noun:
   • A type of corporate bond that gives the bondholder the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company's common stock at certain times during the bond's life, usually at the discretion of the bondholder. This conversion feature is the defining characteristic of a convertible bond.

Usage

• Convertible bonds are hybrid financial instruments that combine features of debt and equity. They are used by companies to raise capital, often offering a lower coupon rate than regular bonds due to the value of the embedded conversion option.
• The terms of conversion, such as the conversion ratio (number of shares per bond) and the conversion price, are specified when the bond is issued.

Examples

• Noun:
  • The tech startup issued convertible bonds to attract investors who wanted the security of a bond but the upside potential of equity.
  • An investor decided to exercise the option and convert her convertible bond into 50 shares of the company's stock.
  • The value of a convertible bond is influenced by both the underlying stock price and prevailing interest rates.

Advanced Usage

• "Mandatory convertible bond": A type of convertible bond that be converted into shares at maturity, as opposed to being redeemed for cash.
• "Conversion premium": The amount by which the price of a convertible bond exceeds the current market value of the common stock into which it can be converted.
• "Forced conversion": When a company calls (redeems) its convertible bonds, forcing bondholders to convert to stock, typically when the stock price is significantly higher than the conversion price.

Variants and Related Words

• Convertible (adj/n): Capable of being changed in form or function. As a noun, it can be shorthand for a convertible security, like a convertible bond or convertible preferred stock.
• Bond (n): A fixed-income instrument representing a loan made by an investor to a borrower (typically corporate or governmental).
• Conversion ratio (n): The number of common shares received upon conversion of one convertible bond.
• Warrant (n): A similar but distinct derivative that gives the right to purchase equity at a specific price.

Synonyms

• Hybrid security: A broader term for financial instruments that combine characteristics of two or more asset classes, such as debt and equity.
• Convertible debt: Another term for a convertible bond, emphasizing its debt characteristics.

Related Phrases

• "In-the-money" convertible bond: A convertible bond where the market value of the shares obtainable through conversion is greater than the bond's face value.
• "Out-of-the-money" convertible bond: A convertible bond where the market value of the shares obtainable through conversion is less than the bond's face value.
• "Busted convertible": Slang for a convertible bond that trades like a regular bond because the underlying stock price is far below the conversion price, making conversion unlikely.

Noun

1. a bond that can be converted to other securities under certain conditions