A corporate bond that can be exchanged for a predetermined number of common shares of the bond’s issuer at any time prior to the maturity of the bond. It is a hybrid derivative security, a combination of debt and equity, whose value depends on the debt and equity components underlying it. Most convertible bonds are subordinated debt of the issuer that may be embedded with call or put options.
From the perspective of an investor, a convertible bond is an ordinary corporate bond (with periodic coupon payments made by the issuer) plus an equity call option that allows the bondholder to convert the bond into common shares. From an issuer’s viewpoint, this bond can be viewed as equity combined with a put option to exchange the equity for an ordinary bond with a swap to maturity that pays a series of coupons to the investor in exchange for the equity’s dividends.
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