What does convertible bond mean?

A convertible bond is a type of corporate bond that gives the bondholder the option to convert the bond into a predetermined number of shares of the issuer's common stock at a specific price, known as the conversion price. This feature gives the bondholder the opportunity to participate in the potential upside of the issuer's stock, as the bond can be converted into equity if the stock price rises above the conversion price. Convertible bonds typically offer a lower coupon rate than non-convertible bonds, as the potential for equity participation provides an additional benefit to the bondholder. The conversion feature also makes convertible bonds more attractive to investors, as it provides a potential hedge against interest rate risk and the opportunity for capital appreciation. From the issuer's perspective, issuing convertible bonds can be advantageous as it allows them to raise capital at a lower cost than issuing traditional debt, as the lower coupon rate reflects the equity participation feature. Additionally, convertible bonds can be an attractive financing option for companies with high growth potential, as they allow the issuer to raise capital without diluting existing shareholders' ownership stakes until the bonds are converted into equity. Overall, convertible bonds offer a unique combination of fixed income and equity characteristics, making them a popular investment option for both issuers and investors in the financial markets.