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🧾financial accounting i review

Convertible bond

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

A convertible bond is a type of bond that can be converted into a predetermined number of shares of the issuing company's stock. It combines features of both debt and equity, offering fixed interest payments with the potential for capital appreciation.

5 Must Know Facts For Your Next Test

  1. Convertible bonds typically offer lower interest rates compared to non-convertible bonds due to the added conversion feature.
  2. The conversion ratio determines how many shares of stock each bond can be converted into.
  3. Conversion price is the price at which the bond can be converted into stock, usually set higher than the current stock price at issuance.
  4. Convertible bonds provide a hedge against inflation since they can appreciate in value if the company's stock performs well.
  5. These bonds can be advantageous for companies as they may reduce interest expense and delay dilution of equity.

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