Convertible Bond

A convertible bond can be exchanged for shares under set terms. It pays interest like a bond, and if the share price rises the holder can convert and capture the gain.

For investors it caps the downside while leaving the upside open. If the shares go nowhere, hold to maturity for principal and interest; if they run, convert and follow them up. That is why the coupon is lower than on ordinary bonds.

Companies benefit too. They borrow at a low rate, and if conversion happens the debt becomes equity, improving the leverage ratio. Early-stage growth companies use the structure often.

Existing shareholders face a cost. Conversion increases the share count and dilutes their stake, and the schedule of convertible shares waiting to come to market can weigh on the price.

So when investing in a company with convertibles outstanding, check the conversion price and the dates conversion becomes available. Supply tends to appear once the share price clears that level.