Convertible Bond
Definition
A bond that gives the holder the right to convert it into a specified number of shares of the issuing company's stock.
Explanation
Convertibles offer the downside protection of a bond (coupon payments and par value at maturity) with the upside potential of equity (conversion into stock if the share price rises). The conversion ratio specifies how many shares each bond converts into. The conversion premium is how far above the current stock price the conversion price sits. Convertible arbitrage involves buying the convertible bond and shorting the stock to isolate the embedded option value.
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