CHAPTER 5

Convertible Bonds

A convertible bond describes a hybrid security that combines both the coupon feature of a bond and the upside participation of equity. Similar to a “straight” (nonconvertible) bond, a convertible bond typically pays periodic coupon, has a stated maturity date, receives ratings from the rating agencies, and has par value of $1,000. The upside participation comes through the conversion feature, which enables the bondholder to convert the bond into a fixed number of common stock. The terms and conditions of conversion usually are set at issuance. The conversion feature added embedded optionality to the bond, and in a given scenario, the convertible bond pricing behavior may be very different from the price behavior of ...

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