Convertible Bonds

 

A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to exchange the bond for common equity shares in the company that issued it. This gives the bondholder both a fixed-income investment with coupon payments as well as the potential to benefit from an increase in the company’s share price. A convertible bond issue, like that of other corporate bonds, will state the maturity and the coupon on the bond. A convertible bond also has information about the conversion option, or how many shares will be received for the bond if it is converted. From the investor’s perspective, a convertible bond has a value-added component built into it; it is essentially a bond with a stock option hidden inside. Convertible bonds are attractive because they historically have been able to provide returns that are highly competitive with common stocks in average equity markets, outperform in poor equity markets and participate in strong equity markets. Convertible bonds provide investors with growth opportunities linked to the performance of the company’s stock, with higher yield and stability and downside protection of bonds.

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