Convertible bond
Hybrid bond convertible into equity shares.
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A convertible bond is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features, originating in the mid-19th century.
Quick Facts
- Origin
- Mid-19th century
- Key feature
- Convertible into common stock or cash
- Common use
- Seed investing in startups
Facts from the source article.
Lore & Background
Convertible bonds originated in the mid-19th century. They are considered debt securities because the issuing company agrees to pay fixed or floating interest, similar to common bonds. To compensate for the additional value of the conversion option, a convertible bond typically has a lower yield than similar non-convertible debt.
Reader's Guide
Convertible bonds are significant as they offer investors the potential upside of conversion into equity while providing downside protection through coupon payments and return of principal at maturity. These properties, along with the fact that convertible bonds often trade below fair value, lead to convertible arbitrage strategies.
For issuers, the key benefit is reduced cash interest payments, and if bonds are converted to stock, the company's debt vanishes. However, conversion dilutes shareholder equity. Convertible notes are also a frequent vehicle for seed investing in startups, allowing debt that converts to equity in a future round without requiring early company valuation.
Did You Know?
- A convertible debenture is a convertible bond that is unsecured, not defined by maturity length.
- Convertible bonds can trade at a premium or discount to fair value depending on market conditions.
Frequently Asked Questions
Who is Convertible bond?
Convertible bond is a hybrid financial instrument that merges debt and equity traits, allowing its holder to exchange the bond for a set number of the issuer's common shares or receive cash of equivalent value. It sits squarely between a plain bond and a stock in the capital-structure lineup.
What is Convertible bond known for?
Its signature ability is the conversion feature, which lets the holder keep collecting coupon payments while retaining the option to pivot into equity upside at a predetermined ratio. This dual nature makes it a go-to vehicle for seed-stage investing in startups, where investors want downside protection paired with growth participation.
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Sources
Compiled from Wikipedia and the sources listed below. Text from Wikipedia is available under CC BY-SA 4.0; this entry is adapted from it.
- Wikipedia: Convertible bond (CC BY-SA 4.0).
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