Convertible Bond
Convertible Debt Security
A bond that can be converted into a predetermined number of the issuer's common stock shares.
Convertible bonds provide investors with fixed income from bond coupon payments plus the potential upside of equity participation through conversion features. The conversion ratio determines how many shares each bond converts into, typically set at a premium to current stock price. Investors benefit from bond characteristics (regular income, principal protection) while maintaining equity upside potential. Companies benefit from lower interest rates compared to straight bonds due to the conversion feature value. Convertible bonds are particularly popular with growth companies seeking to minimize current interest costs while providing investors with participation in future growth. The securities trade based on both bond characteristics and underlying stock performance.
Example
Tesla convertible bonds convertible to TSLA shares, Netflix convertible debt