Definition of Convertible Bond
What is a convertible bond? What is the definition of a convertible bond? What does the term convertible bond mean?
A convertible bond is when a corporation issues debt that can be converted into common shares of the company.
The number of shares that the bond can be converted into is known before the investor purchases the bond.
The investor has the option, but not the obligation, to convert a convertible bond into shares of the company.
Why would a company issue convertible bonds and not regular bonds?
Simple. Companies pay less interest for convertible bond offerings. Companies can get away with paying less interest because convertible bond holdings can benefit from an increase in the company's common shares.
The downside to convertible bond offerings, of course, is the potential conversion of convertible bonds into common shares dilutes the existing shareholders of the company.
Example: XYZ, Inc. issues a convertible bond offering that matures in 5 years. The holders of the bonds have the option of converting their note into 2.9 common shares of the company.
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