| a bond that can be exchanged for a fixed number of shares of the common stock of the issuing company at the holder's option. |
Convertible Bond
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs".
Investopedia Commentary
Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions. For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds, which bondholders will likely convert to equity anyway should the company continue to do well.
From the investor's perspective, a convertible bond has a value-added component built into it it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock.
Related Links
Convertible Bonds: An Introduction
Bond Basics Tutorial
Advanced Bond Concepts
See also: Bond, Busted Convertible Security, Contingent Convertibles - CoCos, Conversion Price, Convertible Preferred Stock, Death Spiral, Hybrid Security, Mandatory Convertible, Residual Security, Stock, Warrant
Also spelled: CVs, CV