Convertible Bond


A convertible bond is a bond which gives the bondholder the right to exchange the bond for a specified number of common shares of the bond issuing company. It is a hybrid security with debt- and equity-like features. 

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For an investor, a convertible bond enjoys quite  a few advantages over non-convertible ones. The bondholder may convert into equity share if stock prices go up, automatically participating in the equity upside. In the absence of price appreciation, they may continue earning regular interest payments with the promise of principal repayment on maturity.

Of course, the catch is the coupon rate (bond interest rate or yield) on convertible bonds is lower than its non-convertible counterpart, and they are more expensive than non-convertible ones.

But compared to dividend yield on common shares of the issuing company, the coupon rate is higher.

For the issuing company, lower coupon rates mean lower interest expense and debt reduction if conversion is exercised. Of course, it dilutes existing shareholders’ rights/stock value.