A convertible bond is a type of debt security that can be converted into a predetermined amount of the underlying company's equity at certain times during the bond's life, usually at the discretion of the bondholder.

Convertible bonds are sometimes referred to as "CVs. 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 bondswhich bondholders are likely to convert to equity anyway should the company continue to do well.

Another reason for issuing convertible bonds is that investors demand a security that optimally protests their principal on the downside but allows them to participate in the upside should the underlying company succeed.

A startup or relatively new company, for example, may have a risky project that loses a great deal of money on one end but may lead the company into profitability and outsize growth. A convertible bond investor can get back some principal upon failure of the company but can benefit from capital appreciation by converting the bonds into equity if the company is successful. Convertible bonds are a useful financing option for both callable convertible bond investopedia and companies when the company's success resembles a binary outcome.

Convertible bonds also allow the companies issuing them to lower their borrowing costs. From the investor's perspective, a convertible bond has a value-added component built into it; it is trading forex is gambling a bond with a stock optionparticularly a call option, attached to it.

Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock. Otherwise, the bond just pays interest to the investor for his capital investment. Dictionary Term Of The Day.

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