Definition
A type of bond that can be turned into a set number of shares of the issuing company’s stock. It offers both debt and equity features.
What to consider
- They offer a chance to switch from debt to equity when conditions are right.
- Watch the underlying stock performance closely.
- Understand the conversion terms before investing.
Real world scenarios
- Raj invests in convertible bonds, enjoying bond-like interest payments initially. When the company’s stock soars, he exercises the conversion option to capture equity gains.
- Lauren’s diversified portfolio includes convertible bonds for both downside protection and potential stock appreciation. She views this hybrid as a balanced compromise.
- A business issues convertible bonds to attract investors who want stable returns with a chance to participate in future share price increases. This strategy helps the firm secure capital under favorable terms.
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