Convertible Bond

Financial Dictionary -> Investing -> Convertible Bond

A convertible bond, otherwise known as a convertible debenture or a CV is a financial term that refers to a bond that can be converted in to shares in a company, normally at a pre-agreed ratio or a pre-agreed equity amount. There may be a given date that the bond can be converted or it is simply left at the discretion of the bond holder.

From a company view point, the main benefit of raising capital by issuing these convertible bonds is the reduced cash interest payment, however, because bond holders can obviously turn their bonds in to common stock it dilutes the value of shareholder equity. In other words unexpected shares can be added on top of the current amount.

This can actually be beneficial because generally, when a company wants to issue more stock the share value drops and people begin to lose faith in the company, but if new stock is issued through convertible bonds it is more covert and there is no wide knowledge that the company's actual aim was to issue more stock.

From the view point of the investor, convertible bonds have that extra value built in that them a great opportunity. They are basically a bond with a stock option hidden inside, giving perceived 2 for 1 type deal.

Similar to convertible bonds are Exchangeables, or XB in its abbreviated form. These special types of bonds can be converted in to other shares and not necessarily those of the issuing company.