Convertible bond
Also called: Convertible debenture · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A convertible bond is a bond that the holder can exchange for a fixed number of the issuing company's shares. Until the holder converts it, it works like a normal bond and pays interest. If the share price rises, converting gives the holder a share in that gain. So it mixes debt and equity, which is why it is called a hybrid instrument. Because of the conversion option, companies can usually pay a lower interest rate on it.
Example
A company issues convertible bonds. Each bond can be turned into 10 shares. If the share price later rises well above the bond's value divided by 10, holders convert and become shareholders. If the share price falls, they keep the bond and are repaid in cash when it matures.
Don't confuse with
- Non-convertible debenture (NCD): this is pure debt. It can never be turned into shares.
Related concepts
- Corporate bond
- Debenture
- Foreign Currency Convertible Bond
- Masala bonds
- Foreign bonds
- Perpetual bond
- AT1 bonds
- Green bonds
- Sovereign green bonds
- Blue bonds