Convertible Bond [CB]

Convertible bonds are hybrid securities that combine features of bonds and stocks, allowing bondholders to convert their bonds into a predetermined number of shares of the issuer’s common stock. For example, a $1,000 bond convertible into 20 shares has a conversion price of $50. If the stock rises above $50, conversion becomes profitable. Convertibles offer downside protection through bond value and upside potential through equity participation. They typically yield 200-300 basis points less than straight bonds due to the conversion option’s value. Companies issue convertibles to access lower interest rates and potentially avoid dilution if bonds aren’t converted. Investors get equity upside with bond-like downside protection. Conversion can be mandatory at maturity or optional throughout the bond’s life. Hedge funds often practice convertible arbitrage, buying convertibles while shorting stock. The convertible market exceeds $500 billion globally, popular among growth companies, especially in technology and biotechnology sectors.