Convertibility is the option of converting a
bond into stock. Bonds with this feature are called convertible bonds.
They give the investor the option to convert the bond into the issuing company's
common stock.
Conversion must occur at specified times, at specified prices, and
under specified conditions. All of these must be set down in writing at the time
of issue. Bonds can also be callable and convertible in one. By this provision,
the company can force investors to convert their bonds to stock.
One advantage to the holder of a convertible bond is that he or
she receives the lower volatility of the bond and the ability to take advantage of
the stock's growth.
One disadvantage is that convertible bonds often offer lower
interest rates than non-convertible bonds. Another is that they are not
secured.
If you have not been introduced to the notion of bond
security, go to the next screen for a quick
introduction.
