What is a Convertible Security?
A convertible security is any type of security that has the potential to be exchanged for other forms of security offered by the same issuing party. Generally, there are certain conditions that must be met before the conversion can take place. Depending on the structure of the terms and conditions associated with the convertible security, both the issuer and the investor may have the ability to initiate the conversion process. One of the more common examples of a convertible security situation has to do with bonds issued by a particular company. The bond issue may be structured in such a way that it is possible to convert the bond into shares of common stock at some point during the life of the bond, or at the point of maturation. Within this example of debenture, the price that will apply to each share of stock issued as part of the conversion from the bond will be set within the terms and conditions that applied at the time the bond was purchased. The investor receives shares of stoc
A. A convertible security is a bond or preferred stock that can be exchanged in other words, converted into the common stock of the issuing company. Convertible bonds may be described as hybrids, in that they combine benefits of both stocks and bonds. For example, convertible bonds typically offer upside appreciation in rising equity markets (like stocks) but can also provide potential downside protection during declining equity markets (like bonds). Convertible bonds also provide income through their coupons.
Any security that can be converted into another security. For example, a convertible bond or convertible preferred stock may be converted into the underlying stock of the same corporation at a fixed rate. The rate at which the shares of the bond or preferred stock are converted into the common is called the conversion ratio.
A convertible security is a hybrid instrument comprised of both debt and equity. It acts like a bond but is exchangeable, at the option of the holder, for common stock. It’s structuring flexibility allows convertible securities to be custom tailored to meet an issuer’s specific objectives. A company wishing to incorporate debt into its capital structure should consider convertible debt as part of, or an alternative to, other sources of debt, such as: Companies ideally suited for Convertible Issuance have features such as: http://www.rbccm.com/0,,cid-29073_,00.
