Bonds & rates
Convertible bond
A bond that can be exchanged for a set number of the issuer’s shares.
How it works
Convertibles pay a lower coupon than ordinary debt because the conversion right has value. They behave like bonds when the share price is low and increasingly like equity as it rises.
For the issuer they are cheap financing; for the holder they offer downside protection with some upside participation.
Where it misleads people
Conversion dilutes existing shareholders. A convertible is a share issue with a delay, and the dilution arrives precisely when the shares have done well.
Related terms
- DilutionThe reduction in your ownership share when a company issues new shares.
- BondA loan you make to a government or company, which pays you interest and returns your money on a set date.
- OptionA contract giving the right, but not the obligation, to buy or sell something at a set price by a set date.
- Capital structureThe ranking of everyone who funded a company, deciding who gets paid first if it fails.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.