Convertible Bonds


Convertible bonds are bonds with the right to convert to a predetermined amount of ordinary shares or preference shares, instead of getting cash repayment. This conversion occurs at a predetermined price and a stated time in the future. The terms are set at issue but are executed usually at the discretion of the bondholder. Convertible bonds are also sometimes called "CVs".

From the investor's perspective, a convertible bond has a value-added component built into it; it is essentially a bond with a stock option hidden inside. Thus, it tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock.