Fixed-Income Securities and Derivatives Handbook, Second Edition

CHAPTER 13

Convertible Bonds

A convertible bond is a corporate debt security that gives the bondholder the right, without imposing an obligation, to convert the bond into another security under specified conditions, usually the ordinary shares of the issuing company. Thus, a convertible bond provides an investor with an exposure to the underlying equity, but allied with a regular coupon payment and promise of capital repayment on maturity if no conversion takes place. From the investor’s viewpoint, a convertible usually presents higher value compared to the dividend stream of the equity, as well as an opportunity to share in any upside performance of the equity. The option represented by the convertibility feature carries value, for which investors ...