convertible bond

A convertible bond is a type of corporate debt that can be exchanged for a predetermined number of the issuing company's common stock shares. This hybrid security offers investors a blend of fixed-income benefits, like regular interest payments, and the potential for capital appreciation if the company's stock price rises significantly.1

Companies may issue convertible bonds to raise capital at a lower interest rate than traditional debt, especially when market interest rates are high or when issuing equity would excessively dilute existing shareholders. For investors, convertible bonds provide some protection against losses, as they have priority over stockholders in the event of bankruptcy. However, they typically offer lower interest rates than comparable non-convertible bonds due to the embedded option to convert into stock.123