Glossary
Convertible Bond
A corporate bond that the holder can exchange for a set number of the issuer's shares, trading a lower coupon for equity upside.
A convertible bond is a company bond that also gives its holder the right to swap it for a fixed number of the issuer's common shares. Investors accept a lower Coupon than on a plain bond in exchange for that option on the stock; issuers get cheaper borrowing at the cost of possible future Dilution.
The key numbers
How it behaves
A convertible acts like a bond when the share price is far below the conversion price: its value leans on the coupon, the repayment of Principal and the issuer's credit. It acts more like the stock as the share price climbs past the conversion price. That mix gives it a floor (the bond value, if the company stays solvent) and upside (the shares), which is why convertibles are popular with hedge funds that buy the bond and short the stock.
What to watch for
The "floor" is only as solid as the issuer. Many convertibles come from younger, unrated or high-yield companies, and if the business struggles both the stock and the bond fall. Issuers can often call the bonds early to force conversion once the stock rises. And for existing shareholders, a large convertible issue means more shares may appear later, which analysts capture in diluted Earnings Per Share (EPS).