convertible bond

A corporate bond or a share of preferred stock that can be converted into shares of common stock of the issuing corporation. Convertibles are hybrid securities that combine the potential price appreciation of equity with the income of bonds. A convertible bond incorporates an equity call option through which the owner can surrender the bond in return for a specified number of common shares. If the stock price falls, or fails to appreciate much, the convertible bond is referred to as busted and will behave as if it were a plain bond trading at its straight value. If the stock price increases, the bond becomes equity-sensitive, since it is likely that the bondholder will choose to convert the bond. Eventually the bond price will approach parity, when it equals the value of the shares into which it can be converted, which is its conversion value.