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In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features.[1] It originated in the mid-19th century, and was used by early speculators such as Jacob Little and Daniel Drew to counter market cornering.[2]
Convertible bonds are most often issued by companies with a low credit rating and high growth potential. Convertible bonds are also considered debt security because the companies agree to give fixed or floating interest rate as they do in common bonds for the funds of investor. To compensate for having additional value through the option to convert the bond to stock, a convertible bond typically has a coupon rate lower than that of similar, non-convertible debt. The investor receives the potential upside of conversion into equity while protecting downside with cash flow from the coupon payments and the return of principal upon maturity. These properties—and the fact that convertible bonds trade often below fair value[3]—lead naturally to the idea of convertible arbitrage, where a long position in the convertible bond is balanced by a short position in the underlying equity.
From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. The advantage for companies of issuing convertible bonds is that, if the bonds are converted to stocks, companies' debt vanishes. However, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares.
Convertible notes are also a frequent vehicle for seed investing in startup companies, as a form of debt that converts to equity in a future investing round.[4] It is a hybrid investment vehicle, which carries the (limited) protection of debt at the start, but shares in the upside as equity if the startup is successful, while avoiding the necessity of valuing the company at too early a stage.
^Scatizzi, Cara (February 2009). "Convertible Bonds". The AAII Journal. Retrieved 8 September 2015.
^Jerry W. Markham (2002). A Financial History of the United States: From Christopher Columbus to the Robber Barons. M. E. Sharpe. p. 161. ISBN 0-7656-0730-1.
^Ammann, Manuel; Kind, Axel; Wilde, Christian (2003). "Are Convertible Bonds Underpriced?: An Analysis of the French Market". Journal of Banking and Finance. 27 (4): 635–653. doi:10.1016/S0378-4266(01)00256-4. SSRN 268470.
^Gilson, Ronald; Schizer, David (2003). "Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock". Harvard Law Review. 116 (3): 874–916. doi:10.2307/1342584. JSTOR 1342584.
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callable bond is higher than the yield on a straight bond. Callable or Redeemable Bonds Advanced Fixed Income: Callable Bonds Teaching Note on Convertible Bonds...
company. A convertiblebond can be thought of as a corporate bond with a stock call option attached to it. The price of a convertiblebond is sensitive...
conditions. An exchangeable bond is different from a convertiblebond. A convertiblebond gives the holder the option to convert bond into shares of the issuer...
convertible security and the underlying common stock. Types of convertible securities include: Convertiblebond Reverse convertiblebondConvertible preferred...
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right will only be exercised at a discount. See: Callable bond; Embedded option; Convertiblebond. "Redemption Value". Retrieved November 12, 2007. Callable...
Chargeback, a reversal of a banking or credit card transaction Convertiblebond, a type of bond that can convert into a specified number of shares Cell Broadcast...
Z – Miscellaneous situations G – first convertiblebond Q – In bankruptcy Special codes H – second convertiblebond R – Rights PK – A Pink Sheet, indicating...
invest in both bonds and stocks or in convertible securities. Balanced funds, asset allocation funds, convertiblebond funds, target date or target-risk funds...
puttable bond is lower than the yield on a straight bond. Put Bond at Investopedia. Accessed September 27, 2011. Teaching Note on Convertible Bonds Puttable...
holder of such a bond has, in effect, purchased a put option on the bond. Convertiblebond: allows the holder to demand conversion of bonds into the stock...
into a bond; common types of bonds with embedded options include callable bond, puttable bond, convertiblebond, extendible bond, exchangeable bond, and...
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feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert, convertible bonds typically have lower...
and bid price) and convertible arbitrage (taking advantage of price differentials between a company's stock price and convertiblebond or stock warrant...
Contingent convertiblebondConvertiblebond Exchangeable bond Extendible bond Fixed rate bond Floating rate note High-yield debt Inflation-indexed bond Inverse...
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produced. Bond Equipe GT Bond Equipe GT 4S Bond Equipe 2-Litre Saloon Bond Equipe 2-Litre Convertible "Vehicle Modifications By Chassis Number". The Bond Owners...
in Saudi Arabia and issued an AED 1.5 billion (US$408.72 million) convertiblebond to Dubai Banking Group, which on maturity in October 2008, was to convert...
built. 123 convertible DB5s were produced (also with bodies by Touring), though they did not carry the 'Volante' name until 1965. The convertible model was...
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