Definition of Convertible Bond

Convertible-bond is a bond that may be converted or exchanged for common shares of the corporation at a predetermined price.

Applying "Convertible Bond" to Securities Exams:

A corporation may elect to issue a convertible bond because it will allow them the sell the bonds with a lower interest rate. Bond investors would be willing to accept a lower interest rate in exchange for the opportunity to convert the bonds into the common stock of the issuer if the common stock does well. The conversion features provides the holders of convertible bonds an opportunity for significant capital gains while maintaining their position as a creditor of the issuer.

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